Types of reversal patterns
In technical analysis, there are three types of reversal patterns:
- Head and shoulders
- Double tops and bottom
- Triple tops and bottom patterns
Head and shoulder pattern
The above chart shows the head and shoulder pattern for a NASDAQ stock.
The head and shoulder pattern is the most common reversal pattern. It forms at the trend’s peak. The pattern has three peaks—left shoulder, head, and right shoulder. The pattern looks like a man’s bust. As a result, it’s called the head and shoulder pattern.
We’ll explain each of the parts in the pattern in more detail.
- Left shoulder – This part of the pattern rallies to form a peak and falls back to the price where it started. It looks like an inverted V.
- Head – In this part of the pattern, the price continues to rise and forms a peak. It’s much higher than the left shoulder peak. Then the price falls back to the same price level from where it rallied.
- Right shoulder – This part of the pattern is the same as the left shoulder. It’s formed on the right side of the head pattern.
The line connecting the bottom of the three peaks is called the neckline. The breakdown below the neckline will result in trend reversal. The neckline is the major support.
Later in this series, we’ll discuss why the head and shoulder pattern is formed.
Applying reversal pattern concepts
In technical analysis, the reversal pattern concepts can be applied to companies like Chesapeake Energy (CHK), Linn Energy (LINE), Range Resources (RRC), and Occidental Petroleum (OXY). These companies are part of energy exchange-traded funds (or ETFs) like the Vanguard Energy ETF (VDE) and the SPDR S&P Oil & Gas Exploration & Production ETF.