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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 Tops

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Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 10/21/2014
16,615 215.14 1.3%
8,486 258.52 3.1%
573 1.94 0.3%
4,419 103.41 2.4%
1,941 37.27 2.0%
YTD
0.2%
14.7%
16.7%
5.8%
5.0%
Tom's Targets    Overview: 10/10/2014
16,800 or 15,800 by 11/01/2014
8,700 or 8,000 by 11/01/2014
580 or 540 by 11/01/2014
4,600 or 4,200 by 11/15/2014
1,950 or 1,800 by 11/01/2014

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 115 to 131. That chapter gives a complete review of the chart pattern, including tour, identification guidelines, focus on failures, performance statistics, trading tactics, and sample trade. Below is just a sliver of the information contained in the book.

Head-and-shoulders tops are the best performing bearish chart pattern in a bull market. Even in a bear market, they are reliable performers, but a pullback occurs nearly two-thirds of the time.

Head-and-shoulders top chart pattern
Head-and-Shoulders Top
 Score your pattern 

 

Important Bull Market Results for Head-and-Shoulders Tops

Overall performance rank (1 is best): 1 out of 21
Break even failure rate: 4%
Average decline: 22%
Pullback rate: 50%
Percentage meeting price target: 55%

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

Head-and-Shoulders Top Identification Guidelines

CharacteristicDiscussion
Price trendUpward leading to the pattern
ShapeLooks like a head perched atop two shoulders. A 3-peak pattern with the middle peak above the others. The pattern should look like a person’s head and shoulders, proportional, and not lopsided.
SymmetryThe two shoulders should peak near the same price, be nearly the same distance from the head, and look similar (both wide or both narrow peaks).
VolumeHighest on the left shoulder followed by the head. Trends downward 63% of the time.
NecklineJoins the two armpits.
ConfirmationThe pattern confirms as a valid one when price closes below an up-sloping neckline or below the right armpit when the neckline slopes downward.
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Head-and-Shoulders Top Trading Tips

Trading TacticExplanation
Measure ruleCompute the height from the head (A in the Measure Rule figure to the right) to the neckline directly below (B) then multiply it by the above "percentage meeting price target." Subtract the result from the breakout price (C). The breakout price is where price crosses an up-sloping neckline, or when the neckline slopes downward, use the right shoulder armpit.
Price reversalPrice must have something to reverse, so if the rise leading to the pattern is small, expect a small decline.
ConfirmationWait for confirmation before placing a trade.
TrendsA short-term rise leading to the pattern results in the best post breakout performance.
VelocityA high velocity rise leading to the pattern often results in a larger decline post breakout.
NecklinePatterns with up-sloping necklines perform better. The Measure Rule figure shows a green up-sloping neckline.
ShoulderA higher left shoulder peak when compared to the right shoulder top results in a larger decline post breakout. The Shoulder Peak figure to the right shows this.
Yearly highPatterns within a third of the yearly high perform worst, but the differences are slight.
Volume trendAn upward volume trend suggests better post breakout performance.
PullbacksPullbacks hurt post breakout performance.
SymmetryPatterns with an extended right shoulder perform worse. Symmetrical looking patterns also perform worse.
Head-and-shoulders top chart pattern measure rule
The Measure Rule

Head-and-shoulders top chart pattern shoulder line

Shoulder Peak

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Head-and-Shoulders Top Example

Head-and-shoulders top chart pattern example

The above figure shows an example of a Head-and-shoulders top chart pattern. The left shoulder (LS) appears above the right shoulder (RS). But, the two shoulders appear symmetrical about the head. A neckline shown in blue, joins the two armpits. Where price closes below the neckline, a breakout occurs and it also confirms the chart pattern as being a valid head-and-shoulders top. A pullback occurs in this example just to make trading interesting.

-- Thomas Bulkowski

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Other Head-and-Shoulders Top Examples

See Also

Copyright © 2005-2014 by Thomas N. Bulkowski. All rights reserved. Does fuzzy logic tickle?