A bearish pattern that is one of the most reliable reversal signals. It occurs when a stock’s price rises to a peak and subsequently declines. Then, the price rises above the former peak and again declines. And finally, it rises again, but not to the second peak, and declines once more. The first and third peaks are shoulders, and the second peak forms the head. A line that connects the ‘arm pits’ of each shoulder forms the neckline. The sell signal occurs when the stock price falls below the neckline.
- It is important to see an increase in volume upon the break of the neckline to confirm the trend has reversed.
- An Inverse Head and Shoulders pattern works the same way, except the pattern is upside down.
