Head and shoulders formation

A sell signal from a head and shoulders formation signals increasing pessimism among investors and the start of a falling trend. Formations like this are considered some of the most reliable formations in technical analysis.

A head and shoulders formation is a top formation which marks the end of a rising period. The formation consists of a left shoulder, a head and a right shoulder, connected by a neckline. The sell signal is triggered when the price breaks downwards through the neckline heading down from the right shoulder.

Sell signal from a head and shoulders formation

At the left shoulder, investors are optimistic. The trend is rising and things are looking good for the company. Optimism is reduced when the head is formed. Here the stock might break out from the trend channel and buyers become more passive or sellers more aggressive. At the right shoulder, the optimists are unable to push the price upwards to a new top. Instead sellers push the price downwards through the neckline and a sell signal is triggered.

The stock breaks support at the neckline and a falling trend begins. A stock that has triggered a sell signal from a head and shoulders formation is indicated to continue falling, for at least as long as the formation is high.

Please note that false sell signals from small head and shoulders formations may arise in long term rising trends. Sometimes these can be spotted by a reduction in volume on the break. This indicates little strength in the price movement, and the stock can easily break upwards again and continue the rising trend. In such situations it can be advantageous to keep the stock and wait to see what happens also after the sell signal. This is especially the case if the stock is still in a rising trend or has support from previous bottoms.

Sometimes good indicators of a coming break exist before the neckline is broken. Volume reduction on or towards the top of the right shoulder indicates that the buyers are passive. Increasing volume on the way down from the head or down from the right shoulder indicates that sellers are aggressive. Passive buyers and aggressive sellers are a bad mix and a clear indication of increasing pessimism in the stock and a coming break downward. In such situations it can be advantageous to sell before the sell signal is triggered.

 


Investtech ei takaa analyysien tarkkuutta tai kattavuutta. Kaikkien analyysien tuottamien neuvojen ja signaalien käyttäminen on täysin käyttäjän vastuulla. Investtech ei vastaa mistään tappioista, jotka saattavat syntyä Investtechin analyysien käytön seurauksena. Mahdollisten eturistiriitojen yksityiskohdat mainitaan aina sijoitusneuvon yhteydessä. Lisätietoja Investtechin analyyseistä löytyy täältä disclaimer.


Investtech ei takaa analyysien tarkkuutta tai kattavuutta. Kaikkien analyysien tuottamien neuvojen ja signaalien käyttäminen on täysin käyttäjän vastuulla. Investtech ei vastaa mistään tappioista, jotka saattavat syntyä Investtechin analyysien käytön seurauksena. Mahdollisten eturistiriitojen yksityiskohdat mainitaan aina sijoitusneuvon yhteydessä. Lisätietoja Investtechin analyyseistä löytyy täältä disclaimer.

Titlex

OK
+

Cookie consent

We use cookies to give you a better user experience. If you continue to use the website, you accept this. For further details click here.

Our use of cookies

When you use our website, we store a cookie on your device. The cookie is used to recognize your device so that your settings work when you use our websites. The information that is stored is completely anonymised. Cookies are automatically deleted after a certain time.

Necessary cookies

Investtech uses cookies to ensure basic functions such as page navigation and language selection. Without such cookies, the website does not function as it should. You cannot therefore make a reservation against these. If you still want to disable such cookies you can do so in your browser settings. In the Cookies section add this website to the list of sites which are not allowed to save cookies on your device.

Cookies from Google

We use services from Google Analytics and Google AdWords. These register cookies on your device when you visit our website. Google registers your IP address in order to keep statistics on user activity on the website. The IP address is anonymised, so that we have no opportunity to link the activities to a specific person. We use these statistics to be able to offer more interesting content on the website and to constantly improve ourselves. Google AdWords collects data so that our advertising on other websites gives better results. We cannot trace the data of individuals.

Allow cookies from Google