Bulkowski’s Head-and-Shoulders Tops

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Head-and-shoulders tops are the best performing bearish chart pattern in a bull market. Even in a bear market, they are reliable performers, but a pullback occurs nearly two-thirds of the time. For more information see pages 405 to 420 of the book Encyclopedia of Chart Patterns, Second Edition and the following

Important Results

Identification Guidelines

Trading Tips

Example

A head-and-shoulders top

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Important Bull Market Results

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

Break even failure rate: 4%

Average decline: 22%

Pullback rate: 50%

Percentage meeting price target: 55%

Identification Guidelines

Characteristic	Discussion
Price trend	Upward leading to the pattern
Shape	Looks like a head perched atop two shoulders. A 3-peak pattern with the middle peak above the others. The pattern should look like a person’s head and shoulders, proportional, and not lopsided.
Symmetry	The two shoulders should peak near the same price, be nearly the same distance from the head, and look similar (both wide or both narrow peaks).
Volume	Highest on the left shoulder followed by the head. Trends downward 63% of the time.
Neckline	Joins the two armpits.
Confirmation	The pattern confirms as a valid one 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 head (A in the Measure Rule figure to the right) to the neckline directly below (B) then multiply it by the above "percentage meeting price target." Subtract the result 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.
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.
Velocity	A high velocity rise leading to the pattern often results in a larger decline postbreakout.
Neckline	Patterns with up-sloping necklines perform better. The Measure Rule figure shows a green up-sloping neckline.
Shoulder	A higher left shoulder peak when compared to the right shoulder top results in a larger decline postbreakout. The Shoulder Peak figure to the right shows this.
Yearly low	Patterns within a third of the yearly high perform worst, but the differences are slight.
Volume trend	An upward volume trend suggests better postbreakout performance.
Pullbacks	Pullbacks hurt postbreakout performance.

Head-and-shoulders top chart pattern measure rule

The Measure Rule

Head-and-shoulders top chart pattern shoulder line

Shoulder Peak

Example

Head-and-shoulders top chart pattern example

The above figure shows an example of a Head-and-shoulders top chart pattern. The left shoulder (LS) appears above the right shoulder (RS). But, the two shoulders appear symmetrical about the head. A neckline shown in blue, joins the two armpits. Where price closes below the neckline, a breakout occurs and it also confirms the chart pattern as being a valid head-and-shoulders top. A pullback occurs in this example just to make trading interesting.