What is the Head and Shoulders Reversal Pattern?
- The stock bounces off of the support line three times, making a head and shoulders pattern
- On the first shoulder, the volume is high
- The volume is lower on the uptrend that creates the head
- People are not voting for the stock to go up. This low volume creates the head
- Important to understand: If the stock bounces and hits the support line again (after the last shoulder), the line becomes a resistance line. You want to make sure it doesn’t bounce down again because that would mean the stock is going below the resistance line.
- A three month pattern is healthier than a two day chart pattern
How to Trade on the Pattern
- Typically, people wait to trade until the stock breaks the neck line region and they trade on the down side (if there is enough volume)