As far as Classic Patterns in technical analysis go, the Head and Shoulders Top formation has got to be one of the most popular and reliable. It is popular because new and seasoned investors can recognize it and reliable because it rarely produces a false positive.

Recognizing a Head And Shoulders Top

Bluntly, the Head and Shoulders top patterns looks like a human head with two shoulders to each side. The left shoulder reaches a peak, then pulls back before rallying higher than the previous peak, then pulling back, and rallying a third time, though not higher than the second rally (the head). Each shoulder should rally to approximately the same levels as one another.

As far as technical analysis is concerned, the head and shoulders pattern also needs to meet a volume requirement. To prove the legitimacy of this pattern, the first rally (or left shoulder) should see heavier volume than the remaining rallies.

More Technical Considerations

Aside from the easily identified pattern that a head and shoulders top creates after the three rallies and the volume requirement listed above, investors should note that the left and right shoulders will peak at roughly the same price levels. As well, the investor can draw neckline between to the two pullbacks and this can slope upwards or downwards. If that neckline is upward-sloping, then the pattern is considered more bullish than a flat or downward sloping neckline. For a solid bearish trade, confirm a downward sloping neckline.

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