The HEAD & SHOULDERS pattern is easily identified by the “neckline”, “shoulders” and “head” that define it. It appears to be a Triple Top, but there are a couple of characteristics that are unique to its pattern. First, the first retest of the initial extreme creates a new extreme by enough margin that it might be mistaken for a breakout. And second, the next retest holds at the initial extreme.
Meanwhile, volume declines as the HEAD & SHOULDERS pattern develops. Although volume increases with each attempt to resume the trend, it peaks at lower highs. Eventually, volume’s pace increases sharply as prices break the pattern’s neckline to reverse the trend.
Despite the HEAD & SHOULDERS pattern being likely to produce a reversal, that reversal is rarely sustainable. Instead, the reversal is usually recovered for one more leg in the original trend’s direction where the larger trend then begins a more sizeable correction.
- PIVOTAL CORRECTION. A variation of this pattern has been catalogued by AvidTrader as a PIVOTAL CORRECTION. The relevant price points and their measurements are applied to any Head & Shoulders pattern to identify target prices, and – when the target produces a reaction – the reaction’s prices. The measurements are derived from the Fibonacci 61.8%, and its 161.8% and 261.8% extensions.
- EXAMPLE ONE. The following graphic portrays the PIVOTAL CORRECTION pattern’s relevant price points that create the basis for the equation to identify the pattern’s potential target prices. The “pivotal high” and “key low” can be replaced with “pivotal low” and “key high” when the pattern is an “INVERTED PIVOTAL CORRECTION”.
- EXAMPLE TWO. The following graphic also portrays the PIVOTAL CORRECTION pattern and its reaction. Also identified is the “pivotal trendline”, which in this case is downtrending. A recovery above the downtrending pivotal trendline offers confirmation that the reaction is underway. This is especially the case when the trendline appears to influence price action. It is also especially the case when the reaction’s pace accelerates upon exceeding the trendline.