Head and Shoulder

The Head-and-Shoulders
If you followed closely and were able successfully to visualize how the foregoing
example of distribution would appear on a chart, you saw a Head-and-
Shoulders Top Formation. This is one of the more common and, by all odds,
the most reliable of the Major Reversal Patterns. Probably you have heard it
mentioned, for there are many traders who are familiar with its name, but
not so many who really know it and can distinguish it from somewhat similar
price developments which do not portend a real Reversal of Trend.
The typical or, if you will, the ideal Head-and-Shoulders Top is illustrated
in Diagram 2. You can easily see how it got its name. It consists of:
A. A strong rally, climaxing a more or less extensive advance, on which
trading volume becomes very heavy, followed by a Minor Recession
on which volume runs considerably less than it did during the days
of rise and at the Top. This is the “left shoulder.”
B. Another high-volume advance which reaches a higher level than the
top of the left shoulder, and then another reaction on less volume
which takes prices down to somewhere near the bottom level of the
preceding recession, somewhat lower perhaps or somewhat higher,
but, in any case, below the top of the left shoulder. This is the “Head.”
C. A third rally, but this time on decidedly less volume than accompanied
the formation of either the left shoulder or the head, which fails
to reach the height of the head before another decline sets in. This is
the “right shoulder.” D. Finally, decline of prices in this third recession down through a line
(the “neckline”) drawn across the Bottoms of the reactions between the
left shoulder and head, and the head and right shoulder, respectively,
and a close below that line by an amount approximately equivalent to
3% of the stock’s market price. This is the “confirmation” or “breakout.”
Note that each and every item cited in A, B, C, and D is essential to a
valid Head-and-Shoulders Top Formation. The lack of any one of them casts
in doubt the forecasting value of the pattern. In naming them, we have left
the way clear for the many variations that occur (for no two Head-and-
Shoulders are exactly alike) and have included only the features which must be present if we are to depend upon the pattern as signaling an important
Reversal of Trend.