Bulkowski’s Complex Head-and-Shoulders Top

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Complex head-and-shoulders tops are strong performers in a bull market, showing a small break even failure rate and large average decline if traded perfectly. Pullbacks occur almost two thirds of the time, so anticipate them happening. For more information see pages 421 to 437 of the book Encyclopedia of Chart Patterns, Second Edition and the following...

Important Results

Identification Guidelines

Trading Tips

Example

Shows is a complex head-and-shoulders top

Important Bull Market Results

Overall performance rank (1 is best): 3 out of 21

Break even failure rate: 4%

Average decline: 23%

Pullback rate: 67%

Percentage meeting price target: 53%

Identification Guidelines

Characteristic	Discussion
Price trend	Upward leading to the pattern
Shape	A head-and-shoulders top with multiple shoulders or multiple heads, but rarely both.
Symmetry	The shoulders should peak near the same price, be nearly the same distance from the head, and look similar (both wide or both narrow peaks) compared to their mirror opposite.
Volume	Usually higher on the left side of the pattern
Neckline	Joins the lowest armpits and is often nearly horizontal. Rarely does it slope steeply.
Confirmation	The pattern confirms as valid when price closes below an up-sloping neckline or below the right armpit when the neckline slopes downward.

Trading Tips

Trading Tactic	Explanation
Measure rule	Compute the height from the highest head (A) to the neckline directly below (B) and then subtract it from the breakout price (C). The breakout price is where price crosses an up-sloping neckline, or when the neckline slopes downward, use the right shoulder armpit. The figure to the right shows an example.
Price reversal	Price must have something to reverse, so if the rise leading to the pattern is small, expect a small decline.
Confirmation	Wait for confirmation before placing a trade.
Trends	A short-term rise leading to the pattern results in the best postbreakout performance.
Price velocity	A high velocity rise leading to the pattern often results in a larger decline postbreakout. The link to the left explores this.
Inner H&S	If the pattern shows an inner head-and-shoulders top, then trade it. The figure to the right shows an example.
Neckline	Patterns with near horizontal necklines perform best.
Yearly middle	Patterns in the middle third of the yearly price range perform best (this may change with more study samples).
Volume trend	An upward volume trend suggests better postbreakout performance. The link to the left defines this while this link explains performance.
Pullbacks	Pullbacks hurt postbreakout performance. The link to the left defines terms while this link explains performance details.

The Measure Rule

An inner set of head-and-shoulders top chart patterns

Inner Head & Shoulders

Example

Adam & Adam double top chart pattern example

The above figure shows an example of a complex head-and-shoulders top chart pattern. This example has two left shoulders (LS), and two right shoulders (RS). The blue neckline is not very steep but if you use that as the standard breakout method, where price closes below a downsloping neckline, it will be at a lower price than if you use the right shoulder armpit low (the dashed red line). The neckline, incidentally, joins the lowest low (armpit) to the left of the head with the lowest low (armpit) to the right of the head.

Notice how price at B returns to the launch point, A. This often occurs when price moves up quickly leading to the chart pattern -- a decline takes price nearly back to the staring price.