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Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Bulkowski's Head-and-Shoulders Bottoms

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Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 11/21/2014
17,810 91.06 0.5%
9,094 40.49 0.4%
596 2.36 0.4%
4,713 11.10 0.2%
2,064 10.75 0.5%
YTD
7.4%
22.9%
21.5%
12.8%
11.6%
Tom's Targets    Overview: 11/14/2014
18,100 or 17,200 by 12/01/2014
9,300 or 8,700 by 12/01/2014
610 or 570 by 12/01/2014
5,000 or 4,500 by 12/01/2014
2,100 or 1,975 by 12/01/2014

Written by and copyright © 2005-2014 by Thomas N. Bulkowski. All rights reserved.

For more information on this pattern, read Encyclopedia of Chart Patterns, Second Edition, pictured on the right, pages 374 to 389.

If you click on this link and then buy the book (or anything) at Amazon.com, the referral will help support this site. Thanks. -- Tom Bulkowski

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Head-and-shoulders bottoms are reliable chart patterns that sport a low failure rate and good average rise. Performance improves if the pattern appears within a third of the yearly high as opposed to near the yearly low.

Head-and-shoulders bottom chart pattern
Head-and-Shoulders Bottom

 

Important Bull Market Results for Head-and-Shoulders Bottoms

Overall performance rank (1 is best): 7 out of 23
Break even failure rate: 3%
Average rise: 38%
Throwback rate: 45%
Percentage meeting price target: 74%

The above numbers are based on hundreds of perfect trades. See the glossary for definitions.

Head-and-Shoulders Bottom Identification Guidelines

CharacteristicDiscussion
Price trendDownward leading to the pattern
ShapeA 3-valley pattern with the middle valley below the others. The pattern should look like an inverted person's head and shoulders, proportional, and not lopsided.
SymmetryThe two shoulders should bottom near the same price, be nearly the same distance from the head, and look similar (both wide or both narrow).
VolumeHighest on the left shoulder or head, diminished on the right shoulder. Trends downward 66% of the time.
NecklineJoins the two armpits.
ConfirmationThe pattern confirms as a valid one when price closes above a down-sloping neckline or above the right armpit when the neckline slopes upward.
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Head-and-Shoulders Bottom Trading Tips

Trading TacticExplanation
Measure ruleCompute the height from the head low (A) to the neckline directly above (B) and then multiply it by the "percentage meeting price target" (see above). Add it to the breakout price (C). The breakout price is where price crosses a down-sloping neckline, or when the neckline slopes upward, use the peak of the right shoulder armpit. See the Measure Rule figure to the right.
Price reversalPrice must have something to reverse, so if the decline leading to the pattern is small, expect a small rise.
ConfirmationWait for confirmation before placing a trade. In the Measure Rule figure to the right, confirmation occurs at C.
TrendsA short-term drop leading to the pattern results in the best postbreakout performance.
NecklinePatterns with down-sloping necklines perform better. The Measure Rule figure to the right shows an example of a head-and-shoulders bottom with a down-sloping neckline.
ShoulderA higher left shoulder valley when compared to the right shoulder valley results in a larger rise postbreakout, but the difference is small. The Shoulder Valley figure to the right shows this.
Yearly highPatterns having breakouts within a third of the yearly high perform best.
Volume trendA downward volume trend suggests better postbreakout performance.
ThrowbacksThrowbacks hurt postbreakout performance.
SymmetryPatterns with an extended right shoulder perform worse. Symmetrical looking patterns also perform better.
Head-and-shoulders chart pattern measure rule
The Measure Rule

Head-and-shoulders chart pattern measure rule

Shoulder Valley

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Head-and-Shoulders Bottom Example

Head-and-shoulders chart pattern example

The above figure shows an example of a Head-and-shoulders bottom chart pattern. The left shoulder (LS), head, and right shoulder (RS) form three consecutive valleys. Shoulder distance from the head is similar as is the price at which the two shoulders bottom. A blue neckline joins armpits A and (B). When price closes above the neckline at C, it confirms the head-and-shoulders bottom chart pattern as a valid one.

-- Thomas Bulkowski

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Other Head-and-Shoulders Bottom Examples

See Also

Copyright © 2005-2014 by Thomas N. Bulkowski. All rights reserved. Backups? We don't need no steenking backups.