Reversal Patterns: Head and Shoulders and the Double Top
Some shapes appear on a chart near the end of an uptrend and describe buyers starting to tire. The best known are the head and shoulders and the double top. Both often fail to complete, and even when they do they can still fail, so it matters to know exactly when a pattern counts as complete.
What you will learn
Recognize a head and shoulders and a double top.
Know the neckline and why breaking it completes the pattern.
Understand the limits of the common way to estimate the move's distance.
The lesson as a short video · 24 seconds · Watch on YouTubeIn this lesson
This shape is made of three peaks: the first (a shoulder), then a higher peak (the head), then a peak lower than the head and close to the first (the other shoulder). Join the two lows between the peaks and you get a line called the neckline. The shape describes a price that made a new high and then could not reach it again.
The double top
Here the price climbs to a peak, falls back, rises to roughly the same level again and fails to pass it a second time. The low between the two peaks is the neckline. The same idea: the price reached one place twice and could not get through.
Head and shoulders
ShoulderHeadShoulder
Neckline at 11.00
Double top
Top 1Top 2
Neckline at 11.30
NecklineThe break: only here is the pattern complete
Both shapes after completing with a neckline break. Before the break, each is just a shape that may or may not complete.
These shapes have mirror versions near the end of a downtrend: the inverse head and shoulders and the double bottom. The same reading, upside down.
When is the pattern complete?
This is the key line of the lesson: in the teaching method used here, we treat the pattern as complete after a close below the neckline. Before that, all you have is peaks on a chart. Many shapes that look like a head and shoulders halfway through never complete, and the price goes on to rise past the head itself.
ExampleIn the drawing of an invented stock, the head is at 13.00 and the neckline at 11.00, so the pattern is EGP 2.00 tall. A common method subtracts that height from the neckline after the break to estimate the move: 11.00 − 2.00 = 9.00, about 18% below the neckline. Some people use that figure as a reference; it is not a target the price has to reach.
Top of the head13.00
Neckline11.00
Pattern height2.00
A common estimate, not a promised target11.00 − 2.00 = 9.00
The distance estimate. The price may stop well short of it, or climb back above the neckline.
Watch outEven after the break a pattern can fail: the price closes below the neckline for a session or two and then climbs back above it. This happens more in thinly traded stocks. These shapes are also seen by eye, so two people can disagree about the same chart.
Look for two peaks on a chart
Open any stock chart over one year and find a place where the price reached the same peak twice. Mark the low between them and see whether the price later closed below it.