1. After a long bullish trends, the price rises to a peak and subsequently declines to form a trough.
2. The price rises again to form a second high substantially above the initial peak and declines again.
3. The price rises a third time, but only to the level of the first peak, before declining once more.
Head and shoulders patterns can also signal that a downward trend is about to reverse into an upward trend. In this case, the stocks price reaches three consecutive lows, separated by temporary rallies. Of these, the second trough is the lowest (the head) and the first and third are slightly shallower (the shoulders). The final rally after the third dip signals that the bearish trend has reversed and prices are likely to keep moving up.
2. The price rises again to form a second high substantially above the initial peak and declines again.
3. The price rises a third time, but only to the level of the first peak, before declining once more.
Head and shoulders patterns can also signal that a downward trend is about to reverse into an upward trend. In this case, the stocks price reaches three consecutive lows, separated by temporary rallies. Of these, the second trough is the lowest (the head) and the first and third are slightly shallower (the shoulders). The final rally after the third dip signals that the bearish trend has reversed and prices are likely to keep moving up.
