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Title of the topic: Head & Shoulder Chart Pattern in Technical Analysis.

Volume: 06/2023 (Issue-4)

SSL Research Centre, Educate Yourself, Volume: 6/2023 (Issue-4), 30th June, 2023

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 Head & Shoulder Chart Pattern in Technical Analysis

Introduction:

Hello dear friends, it’s good to be back with yet another interesting topic for you. This issue will be speaking about Head &
shoulder Chart pattern used in Technical analysis. What is it? How does it work? How to use it and much more. Once you
go through this report you will be equipped with this pattern and be able to use it to your benefit.

The Head and Shoulders chart pattern is a popular and widely recognized reversal pattern in technical analysis. It signals
a potential trend reversal from bullish to bearish and is typically observed at the end of an uptrend. The pattern derives its
name from its visual resemblance to a head with two shoulders on each side.

The Head and Shoulders pattern consists of three prominent peaks, with the middle peak being the highest (the head), and
the other two peaks (the shoulders) being lower and roughly symmetrical in height. These peaks are separated by two
troughs, with the second trough (the neckline) being lower than the first one.

In the above picture two head and shoulder are shown among which the left one is called as the inverted head and shoulder.

The key components of the Head and Shoulders pattern are as follows:

 Left Shoulder: This is the first peak formed during the uptrend. It represents a temporary high point before a minor
decline in price.
 Head: The head is the highest peak in the pattern. It forms after the left shoulder, indicating a higher high in the
price. After the head, the price retraces, forming the second trough near the level of the neckline.

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  Right Shoulder: The right shoulder is the third peak, lower than the head but generally similar in height to the left
shoulder. It forms after a minor rally from the second trough.
 Neckline: The neckline is a trend line drawn by connecting the lows of the two troughs. It acts as a support level.
Once the neckline is broken, it confirms the completion of the pattern.

How Head and Shoulder Works?

The head and shoulders pattern forms when a stock's price rises to a peak and then declines back to the base of the prior
up-move. Then, the price rises above the previous peak to form the "head" and then declines back to the original base
(neckline). Finally, the stock price peaks again at about the level of the first peak of the formation before falling back down.
At this point it is assumed that the price is not able to sustain above that price point.

Criteria:

The Head and Shoulders chart pattern consists of specific criteria that traders look for to identify and validate the pattern .
Here are the key criteria for recognizing a Head and Shoulders pattern:

 Three Peaks: The pattern consists of three prominent peaks. The first peak is the left shoulder, the second peak is
the head, and the third peak is the right shoulder. The head is the highest peak among the three.
 Symmetry: The left and right shoulders should be roughly symmetrical in terms of height and shape. They are
usually lower than the head but are typically at a similar level.
 Troughs: The head and shoulders pattern has two troughs that separate the peaks. The first trough is formed after
the left shoulder, and the second trough is formed after the head. The second trough is usually higher than the first
trough.
 Neckline: The neckline is a trend line that connects the lows of the two troughs. It acts as a support level for the
price. The neckline can be horizontal, sloping up, or sloping down. The slope of the neckline can provide additional
information about the strength of the pattern.
 Volume: Volume is an important factor in confirming the Head and Shoulders pattern. Typically, volume is higher
during the formation of the left shoulder and the head and tends to decrease during the right shoulder. When the
price breaks below the neckline, there is often a surge in volume, indicating increased selling pressure.
 Break of the Neckline: The completion of the pattern occurs when the price breaks below the neckline. This
breakdown is considered a confirmation of the pattern and is often accompanied by increased volume. The break
below the neckline is a signal to traders that the trend is likely to reverse, and they may consider entering short
positions or selling existing positions.
 Price Target: To estimate the potential price decline after the pattern is confirmed, traders often measure the vertical
distance from the head to the neckline and project it downward from the neckline breakout point. This provides an
approximate target for the price decline.

It's important to note that not all head and shoulder patterns will exhibit these criteria perfectly. Traders should exercise
caution and consider other technical indicators and market factors to validate the pattern and make well-informed trading
decisions.

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Interpretation:

The interpretation of the Head and Shoulders pattern revolves around its potential implications for future price movements.
Here's how the pattern is typically interpreted:

 Trend Reversal: The Head and Shoulders pattern is considered a reliable reversal pattern, signaling a potential
shift from an uptrend to a downtrend. The formation of higher highs and higher lows comes to an end with the
pattern, indicating a weakening bullish momentum and a potential reversal in the trend.
 Distribution Phase: The pattern is often seen as a distribution phase, where smart money or institutional investors
are gradually selling off their positions. The left shoulder represents the first sign of distribution, followed by a rally
to a higher high in the head. The right shoulder confirms the distribution as the price fails to reach the previous high,
suggesting a shift in market sentiment.
 Support and Resistance Levels: The neckline of the Head and Shoulders pattern acts as a crucial support-turned-
resistance level. Initially, it acts as a support level during the formation of the left shoulder and the head. However,
when the price breaks below the neckline, it becomes a resistance level, potentially hindering any further upward
movement.
 Price Target: The pattern provides a potential price target for the subsequent downward move after the neckline is
broken. Traders often measure the vertical distance from the head to the neckline and project it downward from the
neckline breakout point. This measurement can provide an approximate target for the price decline.
 Confirmation: Traders wait for a confirmation of the pattern before entering trades. Confirmation occurs when the
price breaks below the neckline, typically accompanied by increased volume. This breakdown below the neckline
validates the pattern and signals that the trend reversal is likely underway.

Time Frame to track the pattern:

The timeframe on which you can track Head and Shoulders chart patterns depends on your trading style and preferences.
Head and Shoulders patterns can be identified on various timeframes, ranging from intraday charts to longer-term daily or
weekly charts. Here are some common timeframes used by traders to track this pattern:

 Intraday Timeframes: If you are a day trader or prefer shorter-term trading, you can look for Head and Shoulders
patterns on intraday charts such as 5-minute, 15-minute, or 1-hour charts. These patterns may form and complete
within a single trading session, providing opportunities for quick trades.
 Daily Timeframe: The daily timeframe is commonly used by swing traders and medium-term traders. Head and
Shoulders patterns on daily charts can take several days or weeks to form and complete. Traders using this
timeframe aim to capture larger price moves and may hold positions for several days to weeks.
 Weekly Timeframe: For longer-term traders and investors, weekly charts can be used to identify Head and
Shoulders patterns that may span several weeks to months. These patterns are often considered more significant
and can indicate potential trend reversals or trend continuation on a broader scale.

The choice of timeframe depends on factors such as your trading strategy, time availability, and the market you are trading.
Shorter timeframes may provide more frequent but smaller trading opportunities, while longer timeframes may yield fewer

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but potentially more significant trades. It's important to align your timeframe with your trading goals, risk tolerance, and
overall trading strategy.

Trading Strategies:

Several trading strategies can be employed when trading the Head and Shoulders pattern. Here are a few common
strategies:

1. Breakout Strategy:

Wait for the pattern to complete with a confirmed breakdown below the neckline.
Enter a short position (sell) once the price breaks below the neckline and closes below it.
Place a stop-loss order above the right shoulder or a recent swing high.
Set a target based on the pattern's projected price decline or use other technical indicators to identify potential support
levels.

2. Retest Strategy:

Wait for the pattern to complete with a confirmed breakdown below the neckline.
After the initial breakdown, wait for a retest of the neckline from below.
Enter a short position on the retest of the neckline if the price shows signs of resistance and fails to break back above it.
Set a stop-loss order above the right shoulder or a recent swing high.
Set a target based on the pattern's projected price decline or use other technical indicators to identify potential support
levels.

3. Neckline Break Strategy:

Enter a short position (sell) once the price breaks below the neckline, but before the pattern completes.
This strategy requires a higher risk tolerance as the pattern has not fully formed yet.
Set a stop-loss order above the right shoulder or a recent swing high.
Set a target based on the pattern's projected price decline or use other technical indicators to identify potential support
levels.

4. Confirmation Strategy:

Wait for the pattern to complete with a confirmed breakdown below the neckline.
Wait for a pullback or a small retracement to the neckline or the broken neckline as a resistance level.
Enter a short position once the price shows signs of resistance and begins to decline again.
Set a stop-loss order above the right shoulder or a recent swing high.
Set a target based on the pattern's projected price decline or use other technical indicators to identify potential support
levels.

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These strategies provide a starting point, but it's important to adapt them to your trading style, risk tolerance, and market
conditions. Additionally, consider incorporating other technical analysis tools, such as trend lines, volume indicators, and
oscillators, to validate the pattern and increase the likelihood of successful trades. Always use proper risk management
techniques, including setting stop-loss orders and managing position sizes, to protect your capital.

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 SSL Research Centre

Chrisanto Silveira Research Department chrisanto.silveira@stockholdingservices.com 022-61778620

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Silveira Date: 2023.06.30

14:07:40 +05'30'

SSL Research Centre, Educate Yourself, Volume: 6/2023 (Issue-4), 30th June, 2023