Bulkowski’s Head-and-Shoulders Bottoms

Click on my books below to take you to Amazon.com They pay for the referral on most items and that helps pay for the cost of this site.

Makes a great gift

Head-and-shoulders bottoms are reliable chart patterns that sport a low failure rate and good average rise. Performance improves if the pattern appears within a third of the yearly high as opposed to near the yearly low. For more information see pages 374 to 389 of the book Encyclopedia of Chart Patterns, Second Edition and the following...

Important Results

Identification Guidelines

Trading Tips

Example

Head-and-shoulders bottom chart pattern

Score your chart pattern for
performance by clicking here

Important Bull Market Results

Overall performance rank (1 is best): 7 out of 23

Break even failure rate: 3%

Average rise: 38%

Throwback rate: 45%

Percentage meeting price target: 74%

Identification Guidelines

Characteristic	Discussion
Price trend	Downward leading to the pattern
Shape	A 3-valley pattern with the middle valley below the others. The pattern should look like an inverted person’s head and shoulders, proportional, and not lopsided.
Symmetry	The two shoulders should bottom near the same price, be nearly the same distance from the head, and look similar (both wide or both narrow).
Volume	Highest on the left shoulder or head, diminished on the right shoulder. Trends downward 66% of the time.
Neckline	Joins the two armpits.
Confirmation	The pattern confirms as a valid one when price closes above a down-sloping neckline or above the right armpit when the neckline slopes upward.

Trading Tips

Trading Tactic	Explanation
Measure rule	Compute the height from the head low (A) to the neckline directly above (B) and then add it to the breakout price (C). The breakout price is where price crosses a down-sloping neckline, or when the neckline slopes upward, use the peak of the right shoulder armpit. See the Measure Rule figure to the right.
Price reversal	Price must have something to reverse, so if the decline leading to the pattern is small, expect a small rise.
Confirmation	Wait for confirmation before placing a trade. In the Measure Rule figure to the right, confirmation occurs at C.
Trends	A short-term drop leading to the pattern results in the best postbreakout performance.
Neckline	Patterns with down-sloping necklines perform better. The Measure Rule figure to the right shows an example of a head-and-shoulders bottom with a down-sloping neckline.
Shoulder	A higher left shoulder valley when compared to the right shoulder valley results in a larger rise postbreakout, but the difference is small. The Shoulder Valley figure to the right shows this.
Yearly high	Patterns having breakouts within a third of the yearly high perform best.
Volume trend	A downward volume trend suggests better postbreakout performance.
Throwbacks	Throwbacks hurt postbreakout performance.

Head-and-shoulders chart pattern measure rule

The Measure Rule

Shoulder Valley

Example

Head-and-shoulders chart pattern example

The above figure shows an example of a Head-and-shoulders bottom chart pattern. The left shoulder (LS), head, and right shoulder (RS) form three consecutive valleys. Shoulder distance from the head is similar as is the price at which the two shoulders bottom. A blue neckline joins armpits A and (B). When price closes above the neckline at C, it confirms the head-and-shoulders bottom chart pattern as a valid one.