This pattern occurs when the market sentiment for a particular asset changes. In a typical head-and-shoulders pattern, market opinion about an asset’s prospects switches from bullish to bearish.
It could be in response to specific events. For example, an unfavourable piece of market news might cause investors to downgrade their price predictions on a stock. Or perhaps rising inflation leads to a decrease in the value of a particular country’s currency.
However, a head-and-shoulders pattern can also occur when overexuberant investors bid up an asset's price. If the market for an asset overheats and prices reach unjustifiably high levels, investor sentiment may turn against it, causing its price to decline.