Hi everyone.
And welcome back to this wealthy education technical analysis video.
Today we'll be talking about reversal patterns and specifically the head and shoulders pattern.
So let's take a look at what a head and shoulders pattern is a head and shoulders pattern a stock is
in an uptrend it reaches a high pulls back and then reaches a subsequent higher high.
And at this point the uptrend is intact as they're making higher highs and higher lows.
The stock then pulls back a second time attempts to make another high and is only able to climb as high
as the first high in the pattern.
So it's now in the process of making a lower high after the second pullback and then the stock continues
to make a lower low.
When it breaks through the neckline of the pattern and the neckline is the trough of the first two pullbacks.
So what we have going on from a psychological level is that the stock is performing as it should.
Making a higher high and the higher low but then that pattern reverses itself.
And we have the stock making a lower high and then a subsequent lower low.
This tells us that the bull trend has come to an end and the stock will either move into a consolidation
pattern or may move into a bearish pattern.
The result is that the pattern looks like a head and shoulders with the shoulders being the two lower
highs and the head representing the highest high that this stock makes.
And the pattern.
So when you break down the head and shoulders pattern as I just said it's the stock moving from a pattern
of higher highs and higher lows to a pattern of lower highs and lower lows.
So let's take a look at that head and shoulders pattern on the chart.
Let's use a chart of 3M for our head and shoulders pattern.
Here we see the stock is trading on a daily basis and we see the stock making a new high here
continuing its uptrend the stock then pulls back
rises
higher so this first High is our shoulder and then we have a head here the stock pulls back again
to this level attempts to rise
and our second shoulder doesn't get quite as high as the first shoulder
and then the stock moves down.
Now this case the stock breaks the neck line.
Which is here.
So we have our head and shoulders pattern complete and then the stock rallies again but it's unable
to close above the high reached in the second shoulder so our trade remains intact.
If we're to go short the stock we want to use the high of the second shoulder as our stop with the stock
not having a close above this high we would have maintained our short position and then we can see the
stock falls off moving from this 80 level down to the seventy four level a perfect head and shoulders
pattern is fairly rare in the charts but as we can see this pattern holds the psychology of the trade
we were making higher highs and higher lows and then the stock reverses to making lower lows and lower
highs.
And again we can use that second shoulder as our stop because that's our resistance level now with the
stock.
So if we take a short position at the NEC line we can use that second shoulder as a stop for our short
position a reverse Head and Shoulders is just the opposite.
You'll have a stock in a downtrend they'll make a low rally back up make a second lower low which is
the reverse head rally back up and then make a third low that matches approximately the price point
of the first low which would then be your second reverse shoulder and then rally above the upside down
neck line and with that pattern we would go long the stock or definitely cover our short position if
we're short the stock which has been in a previous downtrend.
So that's the head and shoulders pattern and the stock of 3M thank you for watching this video on the
head and shoulders pattern and the reverse head and shoulders and our next video we're going to move
on to continuation patterns and we'll be talking about triangles flags and pennant patterns.
I look forward to seeing you in the next video.
Thank you.