The Head and Shoulders pattern is a bearish reversal chart pattern, which is formed by three peaks or highs, with the peak in the middle being higher than the two on the sides. The highest peak represents the “head” and the two peaks on the sides are the “shoulders”. The red line that we see crossing the chart is called the “neckline”.
When the price broke below the neckline for the first time on the EUR/JPY chart above, courtesy of the Forex Broker ActivTrades http://www.activtrades.co.uk/, the neckline was broken. The price usually pulls back to the neckline level after the breakdown and bounces back down to complete the pattern.
This time the price is testing the neckline from below, which acts as resistance from where the price bounces back to the downside. Usually, the price travels the same distance from this point down as the distance from the highest peak, meaning the head, to the neckline. That distance is usually projected downwards from the neckline’s pullback to determine a possible target.
As we see from the chart, this completion of a head and shoulders pattern was almost a text book example. The only thing to point out is that the movement to the downside after the price broke the 148.00 level was accelerated by fundamentals and the pair moved more than 100 pips only to test the 147.00 level and bounce right back up another 100 pips. Amazing volatility.
Alexander Londono – Analyst Contributor at ActivTrades.
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