The head-and-shoulders bottom chart pattern – is generally regarded as a possible reversal of a stock’s current downtrend and into a new uptrend. And if there is one thing that nearly every market observer needs to find right now, it’s stocks on the verge of a possible reversal.
The head-and-shoulders pattern is a popular pattern with traders, but there are a few things key to understanding this picture. First, just what does a head-and-shoulders bottom look like?
A perfect example of the head-and-shoulders bottom has three sharp low points created by three consecutive reactions in the price. It is crucial that this pattern form following a major downtrend in the stock’s price.
The first point – the left “shoulder” – occurs as the price of the stock in a falling market hits a new low and then rises in a minor recovery. The second point – the “head” – occurs when prices fall from the high of the left shoulder to an even lower level and then start to rise again. The third point – the right “shoulder” – happens when prices fall again but do not touch the low of the head. Prices rise again after they have hit the low of the right shoulder. The lows of the shoulders are decidedly higher than that of the head and, in a classic formation, are often more-or-less equal to one another.