Head and Shoulders

A three-peak formation where the middle peak (head) is the highest, while the side peaks (shoulders) are lower. This pattern signals a potential trend reversal from an uptrend to a downtrend. It forms after a strong bullish trend, and a breakout below the neckline support confirms the shift to bearish momentum.

Significance

• Suggests that buyers are losing control, and sellers are taking over.
• Often forms at the end of an uptrend, signaling the start of a downtrend.
• A breakout below the neckline confirms the bearish reversal, providing a strong shorting opportunity.

Characteristics

• Three peaks, with the head being the highest and the shoulders forming at similar levels.
• The neckline acts as a support level; a breakdown below it confirms the pattern.
• Volume generally declines during formation and increases significantly on breakdown.

Market Condition

• Found at the end of a bullish trend, signaling a shift in market sentiment.
• More reliable in high-volume stocks or indices, where institutional selling pressure is visible.

Trading Strategy

• Entry point – Short when price breaks below the neckline with strong volume.
• Stop-loss – Above the right shoulder to limit risk.
• Target price – Measure the head-to-neckline distance and subtract it from the breakdown level.