Head and Shoulders definition

Head and Shoulders is a term often used in technical analysis. Head and Shoulders can apply to top (when it's a bearish indicator) or bottom (when it's a bullish indicator).

Head and Shoulders Top means advancing stock made the first high, retraced some, then made the second higher high, then retraced some, then made the third lower high. The first and third highs are at about the same price, and the second high is at a higher price; so the pattern looks like Head and Shoulders on the chart. Head and Shoulders Top is considered bearish indicator because the third high is a lower high, meaning the stock failed to advance (and therefore it may be ready to retrace further).

Head and Shoulders Bottom is exactly the opposite to Head and Shoulders Top - declining stock makes the first low, then the second lower-low, then the third higher-low. Because the third low is the higher-low, the pattern indicates that the stock may be ready to start advancing further.

Investor Dictionary

A   B   C   D   E   F   G   H   I   J   K   L   M   N   O   P   Q   R   S   T   U   V   W   X   Y   Z