The Head & Shoulders Reversal Pattern


The Head & Shoulders chart pattern is probably one of the most popular and reliable chart pattern used by technical analysts. In this post we are going to discuss this pattern in detail.

Imagine a uptrend, where the stock is making higher highs and higher lows. Then, gradually the peaks and troughs begin to loose momentum and price start moving sideways with no trend. Subsequently, the lower support of the sideways movement is broken and a new downtrend starts. Let's see how such a situation will look like:



In the above chart, price was moving upside with higher highs and higher lows with overall price movement upwards. Then the price began to loose momentum and started moving sideways for some time and ultimately the support levels of this sideways movement were broken,

Main points to be noticed in the pattern:

1) This pattern occurs after a uptrend.
2) The left and right shoulders labelled as S in the above chart are more or less at the same levels.
3) The Head (H) formed in the middle is higher as compared to both shoulders.
4) The pattern will be completed when the neck line support is broken downside.

The following figure will help you understand this pattern further:




Also, notice that once the neckline is broken on lower side there can be a pull-back upwards to the point of breakdown, this point is the best to liquidate all your long positions and go short.

Setting A Price Objective/Target:

The Price objective or target in a head & shoulders chart pattern is set by measuring the distance from the neckline to the top of the head. Once, the neckline is broken downside price generally retraces equal to this distance of the neckline. Following figure will explain the point clearly:


In the above chart, distance between neckline and top of the channel is 1550-950 = 600. So, once the neckline is broken downwards the price will travel down from the neckline to a distance equal to 600, which comes out to 950-600 = 350.

It is important to note here that these are the minimum price objectives, prices may retrace downwards further even after achieving targets of 350. It would be good to consider the major support and resistance on the charts while  arriving at the price targets, suppose if the targets are 350 downwards and we have a major support at 360 levels it would be better to adjust the price targets to 370, because the best technical analysts are those who combine various concepts together and then arrive at their conclusions. Here are few more examples of head and shoulders chart pattern:





Another thing that comes to our mind is that how will we screen for stocks forming particular chart patterns out of thousands of stock available out there. So, in order to solve this issue in our next post I will be coming up with a website where you can scan for all chart patterns as and when they occur.
I hope I was clear with this stuff, you can ask your queries in the comments.

Happy Learning
The Stock King



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16 comments

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anujcool
AUTHOR
March 4, 2015 at 9:27 PM delete

Hey Abhi

Nice post thanks!!.....So will we get any new recos...or its of the table :)

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SauriN PateL
AUTHOR
March 5, 2015 at 8:54 AM delete

Ril bought @1000 rip infra @750.. what to do?? Avg sell or hold?? Or if sell than in what I conver it to recover my money? ?

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March 5, 2015 at 1:11 PM delete

u will be able to generate ur own recos :) :)

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March 5, 2015 at 1:12 PM delete

can't find this tocks can u mention the bse/nse code.........................

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SauriN PateL
AUTHOR
March 5, 2015 at 1:20 PM delete

Sorry m talking abt reliance and reliance infra

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SauriN PateL
AUTHOR
March 5, 2015 at 1:21 PM delete

And also advice on cambridge tech and swiss glasscoat

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March 6, 2015 at 4:43 PM delete

bro reliance is still in downtrend new entry is adviced only if it closes above 950................ and avoid reliance trend still negaive

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March 6, 2015 at 4:44 PM delete

u can go for swiss glasscaot................ avoid cambridge tech its just opertor play

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rishi
AUTHOR
March 6, 2015 at 6:05 PM delete

Abhi what is your view on Ivrcl?

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March 8, 2015 at 9:23 AM delete

avoid ivrcl fundamentally bad..............

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prateek
AUTHOR
March 10, 2015 at 11:11 PM delete This comment has been removed by the author.
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prateek
AUTHOR
March 10, 2015 at 11:19 PM delete

Dear sir,
A company named pfl infotech which is having topline of 0.13 crore and bottomline of just 0.11 crore is having a cmp of 397.the 52 weeks highs and lows were 825 and 375. I want to ask that how company is trading at such a high price after having such a cheap fundamentals. And even the volume of everyday is around 50000.i mean who is selling and who is buying everyday.And if it'S an operator play then how can operator be active in a script for more than 2 years.
Sir in the last I want to ask can't we make money in this script by buying low and selling high
Please clear my doubts
Thank you

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March 11, 2015 at 7:08 PM delete

yes bro checked it now....................... its a pure operator play they took it for 20 to 700 within 2 years and in order to offload their holdings at higher price they kept it there for some time. It has pe of over 700, trading at 38 times of book value and now has broken down for its support levels we will c it at its real worth of 20 very soon avoid it all cost...................... stritly avoid

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Anonymous
AUTHOR
April 2, 2015 at 5:47 PM delete

sir g Lycos keep bare me kyaa raiii h aapki....

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April 2, 2015 at 6:53 PM delete

lyocs is a good share buy for long term..................

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Anonymous
AUTHOR
May 16, 2015 at 1:20 AM delete

Abhishek, its good thing u r doing for new comers..Appreciate if u can put MORE links in Index so we can gradually go in line..and learn little in advance..thanks
. God Bless u...All the Best...

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