It is nearly impossible to talk about chart patterns on stocks without
eventually discussing the very common head and shoulders (H&S)
pattern. An H&S pattern is a reversal pattern that forms after an
uptrend. A textbook H&S pattern starts to form when a stock rallies
to a point and then pulls back to a particular level (shoulder #1).
Next, the stock will rally again, but this time to a higher peak (head)
than the previous shoulder. After forming the head, the stock will pull
back to the same support as the first shoulder did. Finally, the stock
rallies a 3rd time, but not as high as the head (shoulder #2). The level
that has been created by all 3 of the pullbacks is simply a support
level referred to as the “neckline”. The formation of an H&S pattern
warns of a potential reversal of the uptrend into a possible downtrend.
As with any chart pattern, a trader will usually not want to act on the pattern until the stock “confirms” the pattern. Confirmation is the break of the key level that has been created by the pattern. In the case of an H&S, confirmation would be when the stock breaks the neckline (support).
What some traders do not know is that H&S patterns can also form upside-down after a downtrend as well. This pattern would be called an inverse head and shoulders. It would also be considered a reversal pattern, and the neckline would be a resistance rather than a support. To see such a pattern possibly forming, please take a look at the 1-year chart of GES (Guess, Inc.) below with my added notations:
As with any chart pattern, a trader will usually not want to act on the pattern until the stock “confirms” the pattern. Confirmation is the break of the key level that has been created by the pattern. In the case of an H&S, confirmation would be when the stock breaks the neckline (support).
What some traders do not know is that H&S patterns can also form upside-down after a downtrend as well. This pattern would be called an inverse head and shoulders. It would also be considered a reversal pattern, and the neckline would be a resistance rather than a support. To see such a pattern possibly forming, please take a look at the 1-year chart of GES (Guess, Inc.) below with my added notations:
GES peaked at $37 in March and has worked its way lower since. The stock
seems to be forming an inverse H&S (blue). I have noted the head
(H) and the shoulders (s) to make the pattern more visible. GES's
neckline resistance is at the $27 level (red). GES would confirm the
pattern by breaking up through the $27 neckline and the stock should
move higher from there.
Lastly, keep in mind that simple is usually better. Had I never pointed out this inverse H&S pattern, one would still think this stock is moving higher simply if it broke through the $27 resistance level. In short, whether you noticed the pattern or not, the trade would still be the same: On the break above the key $27 level.
Lastly, keep in mind that simple is usually better. Had I never pointed out this inverse H&S pattern, one would still think this stock is moving higher simply if it broke through the $27 resistance level. In short, whether you noticed the pattern or not, the trade would still be the same: On the break above the key $27 level.
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