Head and Shoulders

Explanation: A head and shoulders (HAS) pattern is a bearish breakdown strategy. This occurs when two peaks reside on either side of a larger peak. A support level at the base of the peak pullbacks creates the "neckline". This is the result of a stock having initial bullish momentum, forming one peak (left shoulder), making a new high on the next push (head) and then failing to make another new high on the next push (right shoulder). The bulls are failing to move the stock higher and a failure break of support results in a momentum move to the downside.  Click here for an illustrative example of a head and shoulders pattern. An inverted heads and shoulders pattern is the exact opposite where the center peak makes a lower low than the shoulders and the entry is a break above the neckline.

What to look for:  

  • 2 peaks with lower highs than a center peak that forms between them.

  • Increasing volume on the downtrend that approaches the neckline.

  • Above average volume on the break of the neckline.

Timeframe(s): Any

When to enter:

  • The break below the neckline after a confirmation candle or a pullback retest on lower volume that holds below the neckline.

Profit Target: 
Take profits at 2% and 5% on the way to the next level of support or resistance (either from a price line, trendline or moving average).

Stop Loss: 

  • Head and Shoulders - Just above the neckline.

  • Inverted Head and Shoulders - Just below the neckline.

Examples:

RCL - HAS
RCL - HAS

Daily timeframe

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TSLA - HAS
TSLA - HAS

1-minute timeframe

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BA - Inverted HAS
BA - Inverted HAS

15-minute timeframe

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TWTR - Inverted HAS
TWTR - Inverted HAS

15-minute timeframe

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