The Head and Shoulders is a chart pattern characterized by three peaks, with the two outer peaks being similar in height and the middle peak being the tallest. This pattern indicates a bearish reversal and typically follows an uptrend that features two higher highs (points 1 and 3) and two higher lows (points 2 and 4), which together form the "left shoulder" and "head." Point 5 creates a lower high compared to points 3 and 1, forming the "right shoulder." This pattern suggests that the upward trend is nearing its end, and the reversal is confirmed when the price falls below the "neckline" at point 6, moving past the previous low at point 4.

The pattern is validated once the price breaks through the neckline support (points 2 and 4). It is also important to note whether the ascent to point 3 is less steep than the rise to point 1, and if the climb to point 5 is less steep than that to point 3. Such occurrences indicate that the bulls are becoming less aggressive and that the upward momentum is waning, increasing the likelihood of a reversal.

Many traders and analysts regard the Head and Shoulders chart pattern as one of the most reliable and accurate reversal patterns available. In essence, the Head and Shoulders pattern represents:

• A rally to a new high
• Followed by a decline
• A significant uptrend forming a higher high
• A second decline
• A final rally that creates another higher high but ultimately fails

The line connecting the bottoms, commonly referred to as the "neckline," does not have to be perfectly horizontal. The slope of the neckline serves as an important indicator:

• If the neckline slopes downward, it indicates bearishness, as the price has made a lower low before the right shoulder.
• If the neckline slopes upward, it indicates bullishness, as the price has made a higher low before the right shoulder.

When a Head and Shoulders formation appears during an uptrend, it signals a significant reversal. The strength of this reversal, measured by the decline following the breakout, is proportional to the rise that occurred before the pattern emerged. Stronger preceding trends are likely to result in more dramatic reversals.

Typically, volume is highest at the left shoulder but tends to decrease by the time the breakout occurs. Conditions where volume is trending upward are more favorable, helping to maintain the structure as much as possible.