Head and Shoulders - Stock Chart Pattern

• An initial peak (left Shoulder) preferrably with higher volume
• A second higher peak (Head) preferrably with lower volume.
• A third peak (right Shoulder) preferrably with lower volume.
• The price must break through the neckline to complete the head and shoulders stock pattern.
• Ascending, descending or flat neckline is drawn by connecting the lows of each shoulder

Head and Shoulders Example

In the DIA example below taken from Finviz (which automatically identifies the stock patter) clearly shows the head and shoulders stock chart pattern.  View complete list of current Head and Shoulders stocks.

• Left Shoulder was in place in January 2010 with higher volume
• The Head was defined in April with average volume
• The Right shoulder was put into place in June with lower volume.
• The neckline is flat around $99.  Some say the flatter the neckline makes a more reliable chart pattern. 

head and shoulders chart pattern example

Trading the Head and Shoulders stock chart pattern

Calculating the Target

the final target estimate for a head and shoulders pattern can calculated by subtracting the neckline value ($99) from the head value ($112), which is $13 in this example, and then subtracting this figure ($13) from the neckline value ($99), which is $86.  So the example, we would expect this stock to complete the Head and Shoulders stock chart pattern at $86.

Trading

The pattern is in place when the Right Shoulder is identified.  The first strong trading opportunity occurs when the stock breaks through the neckline on the downside.  You would go short the stock and the neckline will the short term resistance and stop loss.

A retest of the neckline is quite normal and creates another opportunity to short the stock again.