Head-and-Shoulders Bottom

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Head-and-shoulders bottoms are reliable chart patterns that sport a low failure rate and good average rise.

Head-and-Shoulders Bottom: Important Bull Market Results

The above numbers are based on 3,197 perfect trades. See the glossary for definitions.

Head-and-Shoulders Bottom: Identification Guidelines

Characteristic	Discussion
Price trend	Downward leading to the pattern
Shape	A 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.
Symmetry	The two shoulders should bottom near the same price, be nearly the same distance from the head, and look similar (both wide or both narrow).
Volume	Highest on the left shoulder or head, diminished on the right shoulder. Trends downward 65% of the time.
Neckline	Joins the two armpits.
Confirmation	The pattern confirms as a valid one when price closes above a down-sloping neckline or above the right armpit when the neckline slopes upward.

Head-and-Shoulders Bottom: Trading Tips

Trading Tactic	Explanation	The Measure Rule Shoulder Valley
Measure rule	Compute 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 reversal	Price must have something to reverse, so if the decline leading to the pattern is small, expect a small rise.
Confirmation	Wait for confirmation before placing a trade. In the Measure Rule figure to the right, confirmation occurs at C.
Trends	A short-term drop (0-3 months) leading to the pattern results in the best postbreakout performance.
Neckline	Patterns with down-sloping necklines perform marginally better. The Measure Rule figure to the right shows an example of a head-and-shoulders bottom with a down-sloping neckline.
Shoulder	A higher left shoulder valley when compared to the right shoulder valley results in worse postbreakout performance. The Shoulder Valley figure to the right shows this comparison.
Throwbacks	Throwbacks hurt postbreakout performance.

Head-and-Shoulders Bottom: 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.

Head-and-Shoulders Bottom: Other Examples

Head-and-Shoulders Bottom: Trading Lessons

I present the information in slider format, so be sure to click the left or right arrows to view another slide.

Lessons Summary

1 / 6

This is an example of a trading trap. After a multi-peak pattern (underlined in red), a bullish chart pattern appears. In this case, that's the head-and-shoulders bottom. The chart pattern breaks out upward and price rises a minor amount before reversing, ending in a failed trade.

Not all multi-peak patterns will fail, but the odds of success are diminished.

Next chart please.

2 / 6

This chart shows the stock climbing in a straight line run at A. The stock peaks and retraces in a straight line run down (B) to form the left shoulder of a head-and-shoulders bottom. The head-and-shoulders bottom breaks out upward and the stock joins the uptrend again. This is a winning trade.

I don't know if strong up and down trends leading to a chart pattern are the ingredients for success, but it's something to look for.

Next chart please.

3 / 6

This is another example of a rise-retrace trade, but one that ends in failure. The up and down trends leading to the head-and-shoulders look loose and wandering, not straight-line runs as in the prior example. This trade fails to reach the target and ends as a loss.

CLX, from 6/3/2013 to 7/3/2013 (not shown), but a straight-line run up precedes a sloppy, loose looking decline into a head-and-shoulders bottom. The trade also failed, so do be careful taking a position after an uptrend.

Next chart please.

4 / 6

In this example, price makes a strong push lower, following the tall red line. The stock breaks out upward in a tall price bar. However, expect a retrace after that tall bar and that's what we see happen. Indeed, the trade fails.

Other trade failures in a strong downtrend like that shown here are in CRL from 9/22/2011 to 10/18/2011, CMCO from 8/25/2015 to 10/30/2015, and CMI from 7/17/2015 to 8/4/2015. In the last example, the downtrend isn't steep until about 2 weeks before the head-and-shoulders starts.

Next chart please.

5 / 6

When I first saw this setup, I thought Yes, it'll work, and it did.

I consider this an ugly double bottom with bottom B above bottom A. Usually my criteria for a valid pattern means that B is at least 5% higher than the price of A. I didn't bother to check that this time. When the head-and-shoulders bottom breaks out upward at the blue dot, enter the trade and ride price higher.

Next chart please.

6 / 6

When I looked at this chart, I saw overhead resistance setup by the price trend that loosely follows the green line. That resistance would post a barrier to an upward move after the breakout from the head-and-shoulders bottom. In this example, the chart pattern did NOT breakout upward. A breakout would require a close above the red line, which didn't happen. Indeed, the stock tumbled.

The end.

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Bulkowski on Head-and-Shoulders Bottoms