Formation
This pattern is represented by three tops of the market price located at different levels: two lower tops (shoulders) aside and one highest top (head) in between. There is also a neckline ( support) connecting pattern’s lows.
Interpretation of Head and Shoulders
Once the pattern is formed and the price falls below the neckline or support level (plus a certain deviation is possible), investors get a sell signal. The expectation is that the decline will continue, although prices may rebound to the neckline, considered now a resistance, but generally stop around it.
Target price
Following head and shoulders pattern formation the price is generally believed to drop at least to its target level, calculated as follows:
T = N – (H – N), Where:T – target level;
N – neckline level (initial support);
H – pattern’s head level (highest top).
You can see the graphical object on the price chart by downloading one of the trading terminals offered by IFC Markets.