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Pattern 1: Head and Shoulders
Model definition:
A reversal pattern that often appears at the end of an uptrend.
It consists of:
1. Vertex: The highest point between two lower peaks.
2. Right shoulder: A peak lower than the head and equal to or slightly higher than the left shoulder.
3. Left shoulder: The top is lower than the head, and is often equal to the right shoulder.
Form Terms:
Symmetry between the shoulders in terms of size and position.
Neckline: A line that connects the bottoms below the head. Breaking this line is considered a confirmation of the reversal.
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Target ratios for the model:
Target price downside: 53%.
Model failure rate: 4%.
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Model properties:
1. Price trend:
Appears after an uptrend.
Indicates a reversal of the trend to a downside.
2. Shape:
Head and shoulders are three consecutive peaks:
Left shoulder.
Head (top).
Right shoulder (equal to or less than left).
3. Neckline:
Used to confirm breakout and expected decline.
It is usually horizontal or downward sloping.
4. Dealing with the form:
The price target is determined by measuring the distance between the head and the neckline (c).
This measurement is subtracted from the breakout point (neckline) to arrive at the target price.
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Illustration:
The figure shows three peaks:
1. Left shoulder.
2. Head (top).
3. Right shoulder.
The neckline is drawn between the bottoms.
The price target is drawn down when the neckline is broken.
Do you need additional clarification or examples?