A double top at 112, neckline at 105. Where’s the target after the neckline breaks?

About 98. The pattern’s height is 112 − 105 = 7. Down from the neckline: 105 − 7 = 98.

A head and shoulders is drawn, but price is still above the neckline. Is the pattern done?

No: it needs a candle closing below the neckline. Before the neckline breaks it’s just a range with three peaks. Many such patterns never complete and price goes up.

Where’s the stop when buying the breakout of an inverse head and shoulders?

Under the right shoulder. The right shoulder is the last higher low. If price goes under it, the pattern’s logic is broken.

Reversal patterns

Lesson 16 of 23 in the course “Technical Analysis”. Free, with animations and a quiz.

The double top

Price hit the same ceiling twice and couldn’t get through. Between the tops is a pullback; its low is called the neckline. While price is above the neckline it’s just a range. The pattern is done when a candle closes below the neckline. The target is measured by height: from the top to the neckline, and the same distance down from the neckline. A double bottom is the same thing upside down.

Head and shoulders

The best-known reversal pattern; Murphy calls it the most reliable. A left shoulder, then a higher head, then a right shoulder below the head: a new high failed. The neckline joins the two lows between them. A break down through the neckline completes the pattern; the target is the head-to-neckline height, measured down.

And the same at a bottom

An inverse head and shoulders is a bottom pattern: three dips, the middle one deepest. When price closes above the neckline, sellers have lost. The entry is on the breakout or the retest of the neckline from above, the stop under the right shoulder. See, it’s the same HH and HL logic from the trend lesson, just drawn as a nice shape.

Four pattern rules

A reversal pattern only makes sense where there’s something to reverse: after a noticeable trend. Until a candle closes beyond the neckline there’s no pattern, only a guess, and many “heads and shoulders” never complete. A breakout on volume is more reliable. And the height target is a sensible guide for taking profit, not the market’s promise.

Check yourself

A double top at 112, neckline at 105. Where’s the target after the neckline breaks?
Correct answer: About 98. The pattern’s height is 112 − 105 = 7. Down from the neckline: 105 − 7 = 98.
A head and shoulders is drawn, but price is still above the neckline. Is the pattern done?
Correct answer: No: it needs a candle closing below the neckline. Before the neckline breaks it’s just a range with three peaks. Many such patterns never complete and price goes up.
Where’s the stop when buying the breakout of an inverse head and shoulders?
Correct answer: Under the right shoulder. The right shoulder is the last higher low. If price goes under it, the pattern’s logic is broken.

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