Our critical day analysis is all about trend reversals. The line connecting the left and right armpit is referred to as the neckline. After a rise in the market, if a formation that looks like a head and shoulders is forming and price breaks through the neckline after completing the right shoulder, this indicates a possibility that a reversal of the price trend may occur. A head and shoulders pattern can also occur at the market bottom. When it is at a bottom the formation is inverted, like someone upside down.
Volume is usually highest during the left shoulder formation.
As prices slip back, volume recedes, when a second rally forms, volume is again high, the head of the pattern is formed when surging prices and volumes begin to ease and fall back again. The trough between the head and the right shoulder must be below the peak of the left shoulder for the pattern to be considered a head and shoulder pattern. The right shoulder is another rally in prices but typically volume is lower than the volume that created the left shoulder and the head. Sometimes head and shoulders patterns can be more apparent on indicators than in price action. The pattern is valid when it occurs on an indicator but does not mean a reversal of the price trend will necessarily occur.