4. Head and shoulders and the inverse

What it is. The head and shoulders shows up after a rise. It has three tops: the first one (a shoulder), a higher one (the head) and a third one lower than the head (the other shoulder). The bottoms between those tops form a line: the neckline.

What it means. The buyers made a top. Then they made another, bigger one. On the third, they couldn't even get close to the head. The buyers' strength is running out. When the price loses the neckline, the people who were still long give up, and the rise can end right there.

The inverse head and shoulders. It's the mirror image, after a drop. Three bottoms: a shoulder, a deeper head and another, shallower shoulder. The sellers are losing strength. When the price moves up through the neckline, the drop can end right there.

How to draw it. Connect the two bottoms that sit between the tops (in the inverse, the two tops that sit between the bottoms). That's the neckline. It can be flat or slightly tilted.

The confirmation. The price closes on the other side of the neckline. Before that, three tops are just three tops.

One way to set it up (an example, not a rule).

Entry: on the breakout of the neckline.

Stop: beyond the right shoulder.

Exit: in three parts (chapter 16). One reference people use is the height from the head to the neckline, measured from the breakout.

When it dies. The price breaks the neckline and comes back hard to the other side, or goes past the right shoulder.