Head and shoulders pattern
Also known as: head and shoulders top formation, head & shoulders
A head and shoulders pattern is a chart formation with three peaks — a tall middle peak (the head) flanked by two lower peaks (the shoulders). Technical analysts read it as a signal that an uptrend is reversing into a downtrend.
The head and shoulders pattern is one of the best-known reversal formations in technical analysis. Price rises to a peak (the left shoulder), pulls back, rises to a higher peak (the head), pulls back again, then rises to a third, lower peak (the right shoulder). A line drawn across the two intervening troughs forms the neckline, which acts as support.
The pattern is considered complete only when price breaks below the neckline after the right shoulder. Until that break occurs, the formation is unconfirmed. Technicians often estimate a downside target by measuring the vertical distance from the head to the neckline and projecting that distance below the break point. An inverse head and shoulders is the mirror image — three troughs with the deepest in the middle — and signals a downtrend reversing to the upside.
The formation illustrates the core assumption of technical analysis: that supply and demand leave repeatable footprints in price and volume. Each failed attempt to make a new high suggests buying pressure is exhausting itself, and the neckline break marks the point where sellers take control. Chart patterns like this contrast with fundamental analysis, which values a company from its financial statements rather than its price history.
On securities exams, you are far more likely to be asked to identify what a head and shoulders top implies than to draw one. Remember the simple rule: a head and shoulders top is bearish, and an inverse (bottom) formation is bullish. The Series 7 covers the pattern directly, and the Series 65 and Series 66 test it as part of their broader technical analysis material alongside support, resistance, and trendlines.
Key takeaways
- A head and shoulders top has three peaks — a high middle peak (head) between two lower peaks (shoulders).
- The neckline connects the troughs between the peaks; a break below it confirms the reversal.
- A head and shoulders top is a bearish signal, while an inverse head and shoulders is bullish.
- The projected decline is often measured as the head-to-neckline distance subtracted from the breakout point.
- The Series 7, Series 65, and Series 66 all test the pattern as part of technical analysis.