A head and shoulder chart pattern is used in technical analysis of any chart in stock market.
Identification: It begins with the formation of a left peak, a middle peak (higher than the other two) and a right peak (same approximate height as that of the left peak). All these three lie on a common baseline known as neckline.
Occurrence: The head and shoulders pattern forms when a stock’s price rises to create a left peak(preferably due to a rise in consistent volume) and then declines back to the baseline of the prior up-move (defining a neckline). Then from the neckline, the price rises above the left peak (left shoulder) to form the “head” and then declines back to the neckline again. Finally, the stock price peaks again at about the level of the left shoulder of the formation before falling back down (defining the beginning of a downtrend). This whole chart pattern defines the creation of an upward head and shoulder chart pattern.
Study: The head and shoulders pattern is considered as one of the most reliable trend reversal patterns. This upward head and shoulder pattern suggests that an upward trend is nearing its end i.e a downtrend is beginning.
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