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Head and Shoulders

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Head and Shoulders

A major reversal pattern with four distinct features:

* Left Shoulder:

A high volume rally and top followed by a minor reaction with significantly less volume than during the rise and top.

* Head:

Another high volume rally with the top reaching a higher level than the left shoulder, followed by a another reaction on less volume that takes the price to a level near the bottom of the previous reaction.

* Right Shoulder:

A third rally on noticeably less volume that fails to reach the top of the head.

* Neckline:

A decline in prices from the top of the right shoulder which falls below the line formed when connecting the bottoms of the left shoulder and head by at least 2-3% of the stock's market value.

After this head-and-shoulders pattern formed in a daily chart of 3COM Corporation in 1997, the price dropped by more than fifty percent from its high in July to November. This example meets all of the requirements of the pattern as described in the definition.

The overall price movement could have been confirmed by both the technical descriptions of price and volume in the definition, and the trendlines drawn on each. Descending trendlines in both volume and money flow could have suggested that the bears were beginning to overtake the bulls as less money began to flow into the security as had previously been the case.


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