Head and Shoulders

What is Head and Shoulders?

It is basically a pattern in share price charts with a couple of short bulges on either side in addition to a larger one right in the middle. The output, as one could visualize, pretty much resembles the head and shoulders of the human anatomy.
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A head and shoulders chart is typically interpreted by technical analysts as a signal of an impending fall in prices. Similarly, a reverse head and shoulders chart (one where the head and shoulders are formed below the line), indicates towards a continued rise.

These charts are formed when a stock’s value

1. Rises to maximum and then starts declining

2. Then the value again rises and surpasses the previous maximum value before declining yet again.

3. Rises once more – but not as much as the second peak before starting to fall for the third time.

 

Edited and Updated 15th February 2014

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