Chart Analysis - Head and Shoulder Reversal in STRATEGIES & PLANS - Head and Shoulders Top (Reversal) : The head and shoulders pattern is generally regarded as a reversal pattern and it ...
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Head and Shoulder Reversal

  1. Head and Shoulder Reversal

    Head and Shoulders Top (Reversal) :
    The head and shoulders pattern is generally regarded as a reversal pattern and it is most often seen in uptrends. It is also most reliable when found in an uptrend as well. Sellers come in at the highs (left shoulder) and the downside is probed (beginning neckline.) Buyers soon return to the market and ultimately push through to new highs (head.) However, the new highs are quickly turned back and the downside is tested again (continuing neckline.) Tentative buying re-emerges and the market rallies once more, but fails to take out the previous high. (This last top is considered the right shoulder.) Buying dries up and the market tests the downside yet again. Your trendline for this pattern should be drawn from the beginning neckline to the continuing neckline. (Volume has a greater importance in the head and shoulders pattern in comparison to other patterns. Volume generally follows the price higher on the left shoulder. However, the head is formed on diminished volume indicating the buyers aren't as aggressive as they once were. And on the last rallying attempt-the left shoulder-volume is even lighter than on the head, signaling that the buyers may have exhausted themselves.) New selling comes in and previous buyers get out. The pattern is complete when the market breaks the neckline.

    On the AMZN chart above, notice the head and shoulders reversal. While the trend is now bearish, analysis must continue to confirm the bearish trend.

  2. Head and Shoulders Bottom (Reversal) :

    The Head and Shoulders bottom is referred to sometimes as an Inverse Head and Shoulders. The pattern shares many common characteristics with its comparable partner, but relies more heavily on volume patterns for confirmation.

    As a major reversal pattern, the Head and Shoulders Bottom forms after a downtrend, and its completion marks a change in trend. The pattern contains three successive troughs with the middle trough (head) being the deepest and the two outside troughs (shoulders) being shallower. Ideally, the two shoulders would be equal in height and width. The reaction highs in the middle of the pattern can be connected to form resistance, or a neckline.

    The role of volume marks the biggest difference between the two. Generally speaking, volume plays a larger role in bottom formations than top formations. While an increase in volume on the neckline breakout for a Head and Shoulders Top is welcomed, it is absolutely required for a bottom

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