Importance of neckline in Head & Shoulders Pattern
The drawn neckline of the pattern represents a support level, an assumption cannot be taken that the Head and Shoulder formation is completed unless it is broken and such breakthrough may happen to be on more volume or may not be. The breakthrough should not be observed carelessly. A serious situation can occur if such a break is more than three to four percent.
When a stock drifts through the neckline on small volume, there may be a wave up, although it is not certain, but it is observed, the rally normally does not cross the general level of the Neckline and before selling pressure increases, the steep decline occurs and prices tumble with greater volume.
- Most of the time Head and Shoulders are not perfectly shaped. This formation is slightly tilted upward or downward.
- One shoulder may appear to droop.
- On many chart patterns, any one of the two shoulders may appear broader than the other which is caused by the
Time involved in the formation of the valleys.
- The neckline may not be perfectly horizontal; it may be ascending or descending. If the neckline is ascending then the only qualification of the formation lies in the fact that the lowest point of the
- Right shoulder must be noticeably lower than the peak of the left shoulder.
Usage as a tool Head and Shoulders is an extremely useful tool after its confirmation to estimate and measure the minimum probable extent of the subsequent move from the neckline. To find the distance of the subsequent move, measure the distance from the peak of the head to the neckline. Then measure the same distance down from the neckline to the point where prices penetrate the neckline after the completion of the right shoulder. This gives the minimum objective of how far prices can decline after the completion of this top formation.