Hexun Investment Advisor Dong Kai: Head and Shoulders Bottom Appears at the End of the Decline, a Signal of Uptrend

On March 23, Hexun Investment Advisor Dong Kai explained that today we will decode the most classic reversal pattern in technical analysis—the Head and Shoulders Top and Bottom. Market movements resemble mountains and valleys; the Head and Shoulders Top looks like a mountain peak formed by the left shoulder, head, and right shoulder, resembling a person sitting on the ground. In simple terms, it means prices first form a peak, then a valley, indicating a trend reversal. The reason why the Head and Shoulders Top is accurate is because it represents a shift in the forces of bulls and bears. When it appears at the end of an uptrend, it signals a decline; when the Bottom appears at the end of a downtrend, it signals an upward move.

The Head and Shoulders Top consists of four parts, which are easy to recognize: First, the left shoulder, where the price rises and then pulls back to form the first high point; second, the head, which rises again to a new high, higher than the previous peaks; third, the right shoulder, which rises a third time but remains below the head, indicating weakening bullish momentum; fourth, the neckline, a horizontal line connecting the two lows, which is the key breakout level. Simply put, the sequence is left shoulder, head, right shoulder, and neckline—the neckline is the last line of defense; a break below confirms the Head and Shoulders pattern. The pattern has two meanings: the Head and Shoulders Top is a bearish reversal pattern appearing at the end of an uptrend; the Head and Shoulders Bottom is a bullish reversal pattern appearing at the end of a downtrend. The Top indicates the market has reached a peak and is descending; the Bottom indicates the market has bottomed out and is rebounding.

There are three key points for the Head and Shoulders pattern: First, symmetry—left and right shoulders should be roughly symmetrical, without too much deviation; second, volume should match—volume at the head should be the largest, and volume at the right shoulder should significantly decrease; third, a confirmed breakout of the neckline—only when the price effectively breaks through the neckline is the pattern considered valid.

There are also three practical tips: First, trading upon the neckline breakout—buy when the neckline of the Bottom pattern breaks upward, sell when the neckline of the Top pattern breaks downward; second, measuring the target—distance from the head to the neckline is the minimum expected price movement, project this distance from the breakout point of the neckline; third, setting stop-loss levels—place the stop-loss below the low of the right shoulder for the Bottom pattern, and above the high of the right shoulder for the Top pattern. Simply put, only enter after a neckline breakout, use the measured distance as a target, and set stop-losses without hesitation. The Head and Shoulders pattern is not about quantity but about the right position and breakout confirmation. Finally, you can find a recent stock with a Head and Shoulders pattern, analyze whether it’s a Top or Bottom, determine the neckline, and predict whether it will break through.