#Head&Shoulder chart pattern in action
Head and shoulder definition: A simple head and shoulders top formation is characterized by a peak representing
the left shoulder, followed by a higher peak which is referred to as the head of the formation. A lower peak representing the right shoulder is found on the right‐hand side of the head. The head should be the highest peak in the formation. The neckline is a trendline that connects the troughs that lie on either side of the head. Necklines may be horizontal or inclined which in our case is inclined. In an inverted head and shoulders formation (also referred to as a head and shoulders bottom), the head is the lowest
trough within the formation.
Head and shoulder pattern completion: The head and shoulders formation is completed with a valid breakout of the neckline Until a valid penetration has occurred, the formation is regarded as merely tentative. But as you can see in our case the pattern is completed since we can see upside breakout of the chart pattern neckline.
Head and shoulder pattern target: The minimum one‐to‐one price objective or target for a head and shoulders top formation is simply the vertical distance between the head and the neckline projected downward from the neckline breakout level. For an inverted head and shoulders formation, the vertical distance is projected upward from the neckline breakout level. You can see this vertical line in the chart.
Head and shoulder pattern entry:
■■ Short at a break of the right shoulder’s uptrend line with a stop placed above the right shoulder or head (see Point 1 in Figure 13.9)
■■ Short at the peak of the right shoulder with a stop placed above the right shoulder or head, especially when there is a significant resistive confluence comprising of significant Fibonacci retracement levels, Floor Trader’s Pivot Point levels, and
psychologically important price levels associated with double and triple zeros
■■ Short at the right shoulder when it is testing the left shoulder’s resistance level, with a stop placed above the resistance level or head
■■ Short on a valid penetration of the neckline with a stop placed above the neckline, right shoulder, or head (see Point 2 in Figure 13.9)
■■ Short on a retest of the neckline after a valid penetration with a stop placed above the neckline, right shoulder, or head (see Point 3 in Figure 13.9)
■■ Short on the penetration of the price associated with the trough created by the retest action, with a stop placed above the trough, neckline, right shoulder, or head (see Point 4 in Figure 13.9)
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Source: the handbook of technical analysis by Mark Andrew Lim
