This is part of a series of posts on some common chart patterns. The one below is known as a Head & Shoulders Pattern (you need a little imagination here!)
Chart is reprinted courtesy of Stockcharts.com and is also available here
It indicates that the major trend in the price of the stock might be about to reverse. In this example, it signals that a bull phase is about to end, and a bear phase is about to begin.
For this pattern to form, first there should be an uptrend in prices leading to the formation of the “Left Shoulder”. This is a high peak formation. At this juncture, the bulls lose steam and the bears gain an upper hand and the price of the security starts to decline. After reaching a low point, the price begins to escalate again, and the bulls regain control. They drive up the share price all the way up to “Head” point of the Head & Shoulders formation. The “Head” is higher than the “Shoulder”. Here again, you can read a shift in the mood of the market- bears are taking over, but and the price falls only to find the bulls gaining momentum and a “Right Shoulder” being formed. The line connecting the low points on both sides is called the “Neckline”.Once the head, and the two shoulders are formed, the stock price appears to break out below the neckline This is why such charts are often interpreted as an indication of the start of a bear phase and a reversal of the bull phase.
The inverse head and shoulders pattern shown below and as the name suggests, signifies the reversal of the bear phase into a bull phase.
Chart is reprinted courtesy of Stockcharts.com and is also available here
As always, our usual cautions apply- technical patterns are not cast in stone and are not 100% accurate. There are merely guidelines. Use them in conjunction with other confirming evidence.