The head and shoulders topping pattern is the most recognizable of the chart patterns. The pattern consists of 3 peaks: two
low peaks flanking a taller peak. A line connecting the two dips is called the neckline. For this pattern the neckline
is the support line. The time to sell, if you haven't taken your profits at one of the peaks would be as the price can no longer
be supported and breaks through the neckline.
The trading volume for this pattern is significant. Even though the price
is reaching maximums, the volume of sales is declining. There are slight volume increases during the dips but overall the
volume will be decreasing. This is due to traders taking their money and going elsewhere.
So, if your stock has the recognizable 3-peak pattern, a down-trending trading volume and the price falls below the support line...get
out now.
If you are looking to sell short this would be a good indicator for you. The time to sell would be just before
the top of the right shoulder.
The head and shoulders bottoming pattern is the opposite of the topping pattern. Of significance
once again is the trading volume. As more traders recognize the pattern volume increases. The time to buy would be when
price passes through the neckline, which in this case is a resistance line. If you are short then buying at this point would
maximize your profit.
