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Head and Shoulders Chart Pattern: Spot Potential Market Reversals

Head and shoulders futures chart patterns are identified by a left shoulder, head and right shoulder. They are an example of how to use technical analysis to spot potential market reversals. The head and shoulders chart pattern can form in two types:

  • Top – A head and shoulders top pattern signals the end of an upward price trend
  • Bottom – A head and shoulders bottom pattern signals the end of a downward price trend

How to Spot Top Head and Shoulders Chart Patterns

The Crude Oil futures (CL) chart below displays a head and shoulders top pattern:

The left shoulder is the beginning of the head and shoulders top pattern on a futures chart. This completes a long upward price action trend, usually on high volume. Financial instrument price action then reverses from the prior elongated upward trend, usually on low volume.

The head top is formed after the left shoulder pattern is complete and price action reversal on low volume has taken place. Average to high volume accompany the formation of the head before a subsequent decrease in price action on lower volume occurs.

The formation of the right shoulder on lower volume than the left shoulder, signals the completion of the head and shoulders pattern. Right shoulder volume is usually less than during formation of the left shoulder.

How to Spot Bottom Head and Shoulders Patterns

The S&P 500 futures (ES) chart below displays a head and shoulders bottom pattern:

Using technical indicators, you can spot the beginning head and shoulders bottom pattern, referred to as the left shoulder. This completes a long downward price action trend, usually on low volume. Financial instrument price action then reverses from the prior elongated downward trend, usually on high volume.

The head bottom is formed after the left shoulder pattern is complete and price action reversal on high volume has taken place. Average to low volume accompany the formation of the head before a subsequent increase in price action on higher volume occurs.

The formation of the right shoulder on higher volume than the left shoulder, signals the completion of the head and shoulders pattern. Right shoulder volume is usually greater than during formation of the left shoulder.

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