| Technical analysis uses a head-and-shoulders pattern. It forecasts a bullish-to-bearish trend reversal. The pattern is a baseline with three peaks, with the middle peak tallest. To recognize a head-and-shoulders trend reversal, grasp how they're formed. When investors lose interest, the left shoulder develops. The head develops when excitement rises and falls to the stock's prior low. The right shoulder occurs when the stock price climbs then falls again. Drawing a line beneath the troughs before and after the head forms the neckline. When the stock price drops below this trend line, it's a sign the pattern has broken and it's time to sell. Here is an important checklist to increase your chances of identifying a reliable head and shoulders pattern! 1) Is the timeframe high enough? Ideally, weekly or higher 2) Is it after a clear uptrend? 3) Is the Head and Shoulders neckline clear and is price reacting to it? 4) Is the volume of the left shoulder higher than the volume of the head (nice to have but not a must) 5) Is there a clear breakout down from the neckline (pattern confirmed!) Bonus features that strengthen the case of the pattern: A. Are bulls trapped on the right shoulder, as price fakes a breakout above the high of the left shoulder or above a round price (eg. $300 in TSLA stock show in the video)? B . Is there a retest of the crossed down neckline, and a failed re-entrance above the neckline? This shakes out some short sellers. C. Is there high selling volume, post cross down of neckline and possible retest? This confirms more sellers have given up. |
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