Head and shoulders
Head and shoulders is a classical model of turnover following the strong rise or fall movement. The figure is formed by three waves, left and right are shoulders and the middle one is head. The lower levels of all three waves form the neck line (Support level).
When the figure is formed the trading volume decreases with every wave that means the current trend is weakening. Often after the neck line is broken through prices get back to it and it becomes a resistance level.
This model may have more than two shoulders, if there are two shoulders on the left side it is more likely that there will be 2 shoulders on the right.
When analyzing this figure the most common mistake of beginners is opening positions before the figure has finished its formation that happens only after the market is closed lower than the neck level for two days.
The figure is most valuable if its formation occurs with the period of some weeks up to some months.
Fig.1.Two head and shoulders figures.
The reversed head and shoulders figure is defined the same way but in accordance with the bulls market – just as a mirror reflection.
Additionally the following features should be singled out:
If the reversed head and shoulders figure appears on the bearish trend, the bigger second shoulder in comparison with the first one increases the signal of a figure.
If the second shoulder of bullish head and shoulder figure is lower than the first one it is more likely for the trend to turn into a bearish one.
Sometimes it happens so that the price does not turn back to the neck level when it leaves the figure, but it doesn’t mean that this figure is not the head and shoulders one.
Sometimes you can see this figure more often than it really appears. In order to prevent it one should check his suppositions via volume indicators.
It is worth mentioning that at the moment you clearly see this figure the major part of the price movements will be already made. However, you have got valuable information about price movement directions and is more or less sure about your open positions.