WEBVTT 00:01.300 --> 00:01.740 Hi everyone. 00:01.810 --> 00:05.830 And welcome back to this wealthy education technical analysis video. 00:05.830 --> 00:11.740 Today we'll be talking about reversal patterns and specifically the head and shoulders pattern. 00:11.740 --> 00:17.140 So let's take a look at what a head and shoulders pattern is a head and shoulders pattern a stock is 00:17.140 --> 00:24.340 in an uptrend it reaches a high pulls back and then reaches a subsequent higher high. 00:24.340 --> 00:31.380 And at this point the uptrend is intact as they're making higher highs and higher lows. 00:31.420 --> 00:40.210 The stock then pulls back a second time attempts to make another high and is only able to climb as high 00:40.570 --> 00:43.810 as the first high in the pattern. 00:43.810 --> 00:52.420 So it's now in the process of making a lower high after the second pullback and then the stock continues 00:52.420 --> 00:54.700 to make a lower low. 00:54.880 --> 01:03.550 When it breaks through the neckline of the pattern and the neckline is the trough of the first two pullbacks. 01:03.550 --> 01:09.960 So what we have going on from a psychological level is that the stock is performing as it should. 01:10.120 --> 01:18.240 Making a higher high and the higher low but then that pattern reverses itself. 01:18.240 --> 01:23.910 And we have the stock making a lower high and then a subsequent lower low. 01:24.100 --> 01:30.940 This tells us that the bull trend has come to an end and the stock will either move into a consolidation 01:30.940 --> 01:36.040 pattern or may move into a bearish pattern. 01:36.040 --> 01:44.110 The result is that the pattern looks like a head and shoulders with the shoulders being the two lower 01:44.110 --> 01:49.870 highs and the head representing the highest high that this stock makes. 01:49.870 --> 01:50.900 And the pattern. 01:51.000 --> 01:57.490 So when you break down the head and shoulders pattern as I just said it's the stock moving from a pattern 01:57.490 --> 02:03.270 of higher highs and higher lows to a pattern of lower highs and lower lows. 02:04.310 --> 02:07.080 So let's take a look at that head and shoulders pattern on the chart. 02:07.120 --> 02:11.060 Let's use a chart of 3M for our head and shoulders pattern. 02:11.140 --> 02:19.850 Here we see the stock is trading on a daily basis and we see the stock making a new high here 02:22.450 --> 02:27.650 continuing its uptrend the stock then pulls back 02:31.540 --> 02:32.530 rises 02:36.740 --> 02:49.540 higher so this first High is our shoulder and then we have a head here the stock pulls back again 02:52.670 --> 02:56.380 to this level attempts to rise 02:59.880 --> 03:06.330 and our second shoulder doesn't get quite as high as the first shoulder 03:09.100 --> 03:12.020 and then the stock moves down. 03:12.060 --> 03:15.690 Now this case the stock breaks the neck line. 03:19.330 --> 03:20.040 Which is here. 03:23.270 --> 03:28.490 So we have our head and shoulders pattern complete and then the stock rallies again but it's unable 03:28.490 --> 03:36.410 to close above the high reached in the second shoulder so our trade remains intact. 03:36.470 --> 03:43.360 If we're to go short the stock we want to use the high of the second shoulder as our stop with the stock 03:43.380 --> 03:48.920 not having a close above this high we would have maintained our short position and then we can see the 03:48.920 --> 03:58.570 stock falls off moving from this 80 level down to the seventy four level a perfect head and shoulders 03:58.570 --> 04:05.680 pattern is fairly rare in the charts but as we can see this pattern holds the psychology of the trade 04:06.000 --> 04:14.100 we were making higher highs and higher lows and then the stock reverses to making lower lows and lower 04:14.100 --> 04:14.640 highs. 04:15.270 --> 04:22.650 And again we can use that second shoulder as our stop because that's our resistance level now with the 04:22.650 --> 04:23.790 stock. 04:23.790 --> 04:30.240 So if we take a short position at the NEC line we can use that second shoulder as a stop for our short 04:30.240 --> 04:34.850 position a reverse Head and Shoulders is just the opposite. 04:35.040 --> 04:43.590 You'll have a stock in a downtrend they'll make a low rally back up make a second lower low which is 04:43.590 --> 04:52.160 the reverse head rally back up and then make a third low that matches approximately the price point 04:52.580 --> 04:59.240 of the first low which would then be your second reverse shoulder and then rally above the upside down 04:59.240 --> 05:05.630 neck line and with that pattern we would go long the stock or definitely cover our short position if 05:05.630 --> 05:09.370 we're short the stock which has been in a previous downtrend. 05:09.980 --> 05:16.370 So that's the head and shoulders pattern and the stock of 3M thank you for watching this video on the 05:16.370 --> 05:22.810 head and shoulders pattern and the reverse head and shoulders and our next video we're going to move 05:22.810 --> 05:30.010 on to continuation patterns and we'll be talking about triangles flags and pennant patterns. 05:30.010 --> 05:32.220 I look forward to seeing you in the next video. 05:32.230 --> 05:32.560 Thank you.