What does a Head and Shoulder Pattern look like.  The importance of the Head and Shoulders pattern should not be under-estimated.  One of the most reliable patterns in technical analysis yet one of the most misunderstood.

Here we discuss the famous Head and Shoulders price pattern. Understood to be one of the most predictive & reliable of patterns the Head and Shoulders pattern has some unique characteristics. However you do need to know what you are looking for.

A Head & Shoulders Pattern has the following traits.

1. two shoulders.
2. a high point, the head, in between the shoulders.
3. the volume should confirm the pattern.

TeleChart2007 chart courtesy of Worden Brothers, Inc.

So what lessons can we learn from the chart?

1. this is the left shoulder
2. this is the head
3. this is the right shoulder
4. this is the neckline, using a trend-line connect the low from both sides of the head through the outer price limes.
5. the left shoulder was formed on increasing volume. This is to be expected.
6. in the forming of the head we see a significant decrease in volume.
7. in the right shoulder we see also decreasing volume

All of the above conditions of the Head & Shoulders pattern here are consistent with text book descriptions. See the classic book Technical Analysis of the Financial Markets by John J Murphy as a reference.

The Head and Shoulders pattern is said to be confirmed on a break of the neckline, this is about to occur / has occured in the final price bar in July.

Summary.

It appears the S&P-500 is going through a correction, how long it will last is purely speculation. This might however be a good time to be in “Cash” until at least we see an adequate bottom being formed, or the top of the Head at 954 is broken through on large volume.

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