Below is a slider quiz to test your ability to identify head-and-shoulders bottoms and trade them. Captions appear below the pictures in red for guidance, so be sure to scroll down far enough to read them.
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The head-and-shoulders bottom (HSB) (or top) is probably the most famous of the chart patterns. Even the FED has studied it. I show a HSB as LS for the left shoulder,
H for the head, and RS for the right shoulder. The neckline is the red line connecting the two armpits. When it slopes downward, a close above the neckline confirms the HSB as a valid
chart pattern. When the neckline slopes upward, use a horizontal line. You'll see why later. Volume is typically highest on either the
left shoulder or head and diminished on the right shoulder. In this example, the left shoulder has the highest volume. At A, the stock breaks out upward from the pattern (a close
above the neckline).
From the left, an Adam & Eve double top appears as D-D. The first HSB is L-H-R. I drew an up-sloping neckline which is so steep that price never crosses it. That's why
you should use a horizontal (green) line like that shown as a trade trigger. Connect the line with the right armpit and extend it to the right. A close above the line confirms the HSB as
valid and signals a breakout. L1-H1-R1 is another HSB. B-B is a double bottom, maybe Eve & Eve.
L2-H2-R2 is the head-and-shoulders top. D-D is the double bottom, probably Adam & Eve. T-T-T is the triple top even though the left peak is high. L-H-R is the first
head-and-shoulders bottom but don't sweat if it you didn't see it. As I mentioned, this one needs some imagination because the right shoulder should drop lower than it does. L1-H1-R1
is the second HSB. Price has broken out upward from the HSB and confirmed it as valid. How far will price rise? Pick one of the green lines, 0, 1, or 2.
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I show the HSB as L-H-R. As the chart shows, price climbed to line 1 before reversing.
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