Head and shoulders bottom

Buying a share that has been falling is uncomfortable. It is cheaper than it was, but it was cheaper last week too, and it kept falling. The head and shoulders bottom is a way of waiting for the chart to show the fall has stopped before you commit. You don't get to buy the lowest price. What you get is a rule that tells you when to act.

neckline

The line joining the highs of the two bounces in the middle of the pattern. It can be flat or sloped. Until the price closes above it, there is no pattern, only a falling share that has bounced twice.

reversal pattern

A shape on a chart that people read as the end of one trend and the start of the opposite one. It describes what the price has done so far. It is not a mechanism that makes the price turn.

The shape, in four steps

1. Left shoulder. The share falls, usually on rising volume, then bounces. Volume tends to fade as it bounces.
2. Head. The bounce stalls and the price falls again, this time below the left shoulder's low. It stops and bounces back to around where the first bounce ended, often on more volume than before.
3. Right shoulder. The second bounce stalls near the same high as the first, and the price falls a third time. This time it stops at about the left shoulder's level, on very thin volume, then turns up again.
4. The neckline breaks. Join the two bounce highs with a line. When the price closes above that line, on clearly more volume than usual, the pattern is complete.

Each of these is a description of what the chart did, and none of them is a strict rule. Real charts are messier than the figure. The shoulders are rarely equal, the neckline is rarely flat, and there is often a small extra dip that does not fit anywhere. If you have to squint to see the shape, it probably is not there.

What people read as a stronger version

• A right shoulder that stops above the left shoulder. Sellers gave up at a higher price the second time. The right shoulder landing level with the left is just as common, so this is a preference, not a requirement.
• A neckline that slopes upward. Each bounce reached higher than the one before.
• The heaviest volume of the whole pattern on the day it closes above the neckline. More people took part in the break than in any of the falls.

These are things traders commonly say, and they are reasonable to look for. None of them has been shown to change how often the pattern works out. Treat them as reasons to be more interested, not as proof.

The two places people buy

The first is the close above the neckline, on volume well above normal. This is the same breakout rule as any other key point: the close counts, a touch during the day does not. The second is the pullback. After a break, the price often comes back to the neckline. If it holds there without closing back under the neckline and then turns up, the old ceiling has become a floor. Some people add to their position at that point, in a smaller amount than the first.

The target most people use is a measured move. Take the depth from the head's low up to the neckline, and copy it once above the neckline. It is a ruler, not a forecast. The price can stop well short of it or go far past it, and the arithmetic has no say in which.