Financial Literacy Investing

Head and Shoulders Chart Pattern Explained

BY Spectrum Wealth Management | Mar 29, 2022

Article written by Greg Thompson CMT®, Portfolio Manager

At Spectrum, our diverse team of experts is continually working behind the scenes to ensure your investments align with your financial goals. We also believe that knowledge is power and strive to share financial knowledge with our clients and the general public.

As a Chartered Market Technician (CMT®), I use technical analysis to evaluate investments and identify trading opportunities by analyzing statistical trends and charts gathered from trading activity. I then recommend trades from a variety of financial instruments and markets.

Historical trading activity and price changes of a security can be invaluable indicators of a security’s future price movements. Charts are regularly used when observing the market to predict future performance.

Let us explore a common chart pattern: Head and Shoulders.

A head and shoulders pattern is a chart formation that appears as a baseline with three peaks, where the outside two are close in height, and the middle is highest – resembling a head and shoulders silhouette. 

This pattern forms when a stock’s price rises to a peak and subsequently declines to the base of the prior up-move. Then, the price rises above its former peak to form a “head” and again declines to the original base. Finally, the stock price rises again, but to the level of the initial peak of the formation before it declines back down to the base “neckline” one more time. This pattern is considered one of the most reliable trend reversal patterns and predicts a bullish-to-bearish trend reversal in technical analysis. If there is a close below the neckline, this would be considered a sell signal.

Spectrum Wealth Management, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Additional information about Spectrum’s investment advisory services is found in Form ADV Part 2, which is available upon request. The information presented is for educational and illustrative purposes only and does not constitute tax, legal, or investment advice. Tax and legal counsel should be engaged before taking any action. The opinions expressed and material provided are for general information and should not be considered a solicitation for purchasing or selling any security.