Head and shoulders pattern

A head and shoulders pattern is a reversal formation that appears after an uptrend, made up of three successive peaks, a left shoulder, a higher middle peak called the head, and a right shoulder that roughly matches the height of the left shoulder. A line connecting the low points between the three peaks forms what is called the neckline, and the pattern is considered complete once price breaks decisively below that neckline after forming the right shoulder.

The pattern reflects a gradual loss of buying momentum. The left shoulder and head show the uptrend still pushing to new highs, but the right shoulder failing to exceed the head signals that buyers could no longer push price to another new high, a sign that demand is fading even though the stock has not yet turned down. The break below the neckline confirms that sellers have finally taken control after that fading momentum.

An inverse head and shoulders is the same pattern flipped upside down, forming after a downtrend with three troughs instead of peaks, and it signals a bullish reversal once price breaks above its neckline. In both versions, traders commonly estimate a price target for the move that follows the breakout by measuring the vertical distance from the head down to the neckline and projecting that same distance beyond the breakout point, a version of the measured move technique also used with other reversal and continuation patterns.