Of all of the patterns, perhaps the easiest one to spot is the head and shoulders pattern.
This is a bearish pattern, but there is also an inverse pattern which is bullish.
The pattern has five points to it. There is the left shoulder, the left side visit to the neckline area, the head, the right side visit to the neckline, and the right shoulder.
As you can see, it looks like somewhat like the outline of a human from behind. The stock is on the rise and then it cycles lower as investors take some profits. That temporary high forms the left shoulder.
After a brief pullback, investors start buying again and the next upward cycle starts. That brief pullback and the temporary low create the left side of the neck. The next cycle higher moves above the first high and forms the head. Once again investors decide to take some profits off the table and the next downward cycle takes the stock back down to form the right side of the neck.
Investors see the temporary pullback as a buying opportunity and drive the stock higher once again, but the stock doesn’t have enough momentum to get as high as the head. This third high is near the same level as the first high and forms the right shoulder.
Because the momentum wasn’t enough to carry it to a new high, there is more momentum to the downside and the stock moves below the neckline. At the point where the stock moves below the neckline, that is the confirmation point of a bearish head and shoulders pattern. The probability for the downside momentum to continue is pretty high at this point.
The Bullish Head and Shoulders
The inverse or bullish head and shoulders is the opposite image of a bearish head and shoulders. It has all the same parts—two shoulders, a neckline, and the head. Only instead of the shoulders and head being formed at high points for the stock, they are formed at low points.
The investor psychology is the opposite of the bearish pattern. The stock is falling and hits a temporary low to form the left shoulder before a bounce occurs and forms the left side of the neck. The upward momentum is temporary and the next down leg takes the stock lower than the left shoulder and forms the head.
Investors jump in thinking the new low is a buying opportunity but then start taking profits after a decent run up to the neckline. The profit-taking creates the next down leg, but investors start buying on this third down leg before it gets down to the previous low. This forms the right shoulder and starts the next upward move.
Now, the momentum is to the upside and the buying pressure sends the stock above the neckline. At this point, the pattern is confirmed. After breaking above the neckline, the upward momentum is likely to continue and the stock price keeps moving higher.
In Real Chart Examples, the Pattern Isn’t Perfectly Symmetrical
With the drawings, the patterns are drawn perfectly symmetrical so they are easier to explain and recognize. However, on real charts the pattern is very rarely symmetrical. Sometimes the neckline will have a little slope to it and one shoulder may be a little lower or higher than the other.
Here is an example of a bullish head and shoulders pattern that was spotted by the Tickeron Pattern Search Engine on Apple.
The first shoulder is formed in mid-August with the first trip to the neckline coming at the end of August. The head forms on September 25 and then the stock moves up to form the right side of the neck. Another slight dip around October 20 forms the right shoulder and then the stock moves sharply higher and moves all the way up above $173 from the $160 area.
Because the patterns aren’t symmetrical, sometimes they can be difficult to spot. That’s why an artificial intelligence program like Tickeron’s Pattern Search Engine is so valuable. It can find the patterns easier than the human eye and give subscribers more opportunities.
Tickeron’s AI technology has confirmed over 33,000 head and shoulders patterns over the years and the number of successful trades was over 19,000. This is a winning percentage of approximately 58%.
Even more impressive than the 58% accuracy rate is the average return on the successful readings. The average return was 12.05% on the successful trade ideas while the average loss on the unsuccessful trade ideas was only 6.57%.
With that success rate and with the average return on successful readings being so much better, investors could have a tremendous advantage. The Tickeron Pattern Search Engine can help investors find trading opportunities with the touch of a button.
To see how Tickeron’s AI can help you find head and shoulders patterns and 36 other patterns, sign up for a 45-day free trial today.