What is a ‘Head And Shoulders Pattern’
In technical analysis, a head and shoulders pattern describes a specific chart formation that predicts a bullish-to-bearish trend reversal. The head and shoulders pattern is believed to be one of the most reliable trend reversal patterns. It is one of several top patterns that signal, with varying degrees of accuracy, that an upward trend is nearing its end.
Explaining ‘Head And Shoulders Pattern’
This pattern is comprised of three component parts:
Tug-of-War
Stock prices are the result of a continuous game of tug-of-war; whether a stock’s price goes up or down is the direct result of how many people are on each team. Those who believe a stock’s price will go up are called bulls, and those who believe the stock will go down are called bears. If more of a stock’s shareholders are bears, then its price will go down as they sell their shares to avoid losing money. If more people are bullish, then the price will go up as new investors buy in to take advantage of the opportunity.
The Head and Shoulders Story
Like all charting patterns, the ups and downs of the head and shoulders pattern tell a very specific story about the battle being waged between bulls and bears.
Further Reading
- Identifying noise traders: the head-and-shoulders pattern in US equities – papers.ssrn.com [PDF]
- The predictive power of “head-and-shoulders” price patterns in the US stock market – academic.oup.com [PDF]
- Head and shoulders: Not just a flaky pattern – papers.ssrn.com [PDF]
- Identification of the head-and-shoulders technical analysis pattern with neural networks – link.springer.com [PDF]
- Identification of technical analysis patterns with smoothing splines for bitcoin prices – www.tandfonline.com [PDF]
