The head and shoulders formation is considered to be one of the strongest bearish formations. As with the inverted cup and handle, here too, the structure involves candles consolidating above the line of support in expectation of its breakdown.
The head and shoulders formation, being so powerful, is a favorite of traders and therefore draws the attention of sellers and short sellers more than other formations.
The formation is comprised of a left shoulder indicating the first low price, a head indicating the upward correction and a return to the low, and a right shoulder indicating an additional correction followed by the return of the stock to a low at the support point. The low’s breakdown is where support breaks, and also where the short enters.
Head and Shoulders Formation - AGCO
The tractor manufacturer AGCO Corporation (AGCO) drops immediately when the trading session opens, corrects a little upwards, and forms the left shoulder , corrects and forms the head , returns to the support line, corrects again and forms the right shoulder , and finally breaks the line of support.
Inverse Head and Shoulders
The inverse head and shoulders is a bullish formation, and the opposite of the head and shoulders. Similar to the cup and handle, here too, the structure shows candles consolidating beneath the line of resistance in anticipation of its breakout.
The inverse head and shoulders, also a strong formation, is a favorite among traders and draws more buyers than other formations.
The structure is comprised of a left shoulder indicating a high price, a head indicating the downward correction and a return upwards to the line of resistance, then a right shoulder indicating a further correction, and a return of the price back to the line of resistance. The breakout through resistance is also the point of long entry.
Inverse Head and Shoulders, the Fuel Company – ATPG
ATP Oil and Gas Corp. ($ATPG) drops sharply when the trading session opens, corrects upwards and forms the left shoulder . It then drops to a new low, but returns to the area of resistance of the left shoulder, and in this way forms the inverted head . It corrects again and forms the right shoulder . It should now be fairly clear that the price is reversing direction. The right shoulder  indicates that buyers are no longer panicked, compared to the head , and that a breakout of the resistance line should lead to a high.
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