Head and Shoulders

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Head and shoulders is a technical analysis term used to describe a chart formation in which a stock's price:

1. Rises to a peak and then declines to a certain price called a neckline. This is the left shoulder. 2. The price rises again, this time above the former peak and again declines to the neckline. This is the head. 3. The price rises again, but not to the head peak, and declines once more to the neckline. This is the right shoulder.

The are two types of head and shoulders patterns, a Bearish Head and Shoulders Top, and a Bullish Head and Shoulders Bottom.

A Bearish Head and Shoulders Top usually occurs after a long uptrend and is a trend reversal pattern. It gives a sell signal at the formation and closing of the right shoulder.

Image:bearishhs.gif

A Bullish Head and Shoulders Bottom usually occurs after a long downtrend and is a trend reversal pattern. It is a Bearish Head and Shoulders Top flipped upside down and is a buy signal at the closing of the right shoulder (breakout).

Image:Bullishhs.gif

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