Reversals You Should Recognize
Stock patterns are the technical analyst’s best friend because they allow the seasoned analyst to make educated predictions about what the future of a security holds, simply by studying the past. The head and shoulders top pattern is very common and is used by analysts to predict a reversal in the stocks trend. This means that regardless of whether the stock has been increasing or decreasing in price, spotting this pattern will alert you to the fact that this particular trend is about to chance in a big way. .
The head and shoulders top is simply the most common form of this pattern, characterized by two smaller spikes in price flanking a very large spike in price. From left to right on the stock price chart, these three successive peaks are referred to as first shoulder, the head and the second shoulder. Connecting them are two trend lines, one up and one down, which form the “neck” of the pattern. It’s also important to be very sure of your confirmation of an uptrend line leading into the whole pattern..
In most cases, analysts prefer that the left and right shoulders of the pattern form symmetrically, but this is not a requirement to confirm the pattern. It is possible that the shoulders will be different widths or even different heights. More than the shoulders, it is important for an investor to execute proper identification of the neckline support trendlines and volume confirmation on the break. When you spot the support break it’s safe to assume that the market has been injected with a new willingness to sell at decreased prices.