Head and Shoulders is a reversal pattern that happens after an Upternd, H&S has three peaks two shoulders (left and right shoulders which are low peaks and almost equal) and head (highest peak which is in the middle), the completion of the pattern gives us the signal of a Reversal. As the pattern forms we have pullbacks, those pullbacks will be forming a Neckline (horizontal support line).
Head and Shoulders contains Left Shoulder, Head, Right Shoulder and a Neckline, that's the basic breakdown of this pattern. As every pattern we also pay attention for Breakouts, Fakeouts, Volume, Target, Retests and Pullbacks. Let's look at the Image below on a real chart on how can we play H&S pattern and have a breakdown on how the pattern forms.
At image above we see the whole idea on how the H&S pattern works.
Left Shoulder - takes formation in continuation of the Uptrend, after it reaches it's peak it has to pullback and make a low above the trend. After the left shoulder has formed,
The Head - starts a a new peak that extends above the left shoulder. As the peak on the head is reached it declines back to the neckline and creates the second mark. The heads decline usually in most cases breaks the major uptrend support line and starts a reversal precess to the down side. When the low is made from the head it starts to form the
Right Shoulder - the peak of the right shoulder creates a new lower high and usually the same size as the left shoulder, that shows us weakness in the uptrend the was broken and signals our reversal. After the right shoulder has formed now we watch the
Neckline - as the low of the right shoulder should be breaking the neckline and start a new trend down. As we get closer to the neckline we should be paying attention to the Volume as that's the key confirmation of the Breakout.
Breakout - always best as it is confirmed by volume (you can use OBV, CMF or other indicators to help with that) Breakouts usually give the opportunity to get out for the longs (bulls) with a retest of the support line which has turned and works as resistances line.
Our Target - after the breakout can be measured differently, by Fibonacci tools, support/resistance area or my preference
Projected Bar - in the chart above we see the peak of the head to the neckline is $32.50 to $20, so our measured move is $12.50, our target was hit with a measured move of $10. Remember the measured moves is NOT always exact as our projected bar shows.
