A number of writers have referred to this formation on the web so we assumed that it was well and truly covered and understood, however, we have a had a number of questions regarding heads, shoulders, neck lines and reversals etc, from our readership so we will give it our 'take' on it for what its worth.
In a nutshell this chart formation consists of a peak which is the head and a left and right shoulder which are lower and usually similar in shape and size. Imagine that you are looking at silhouette of another person and you have got it. These patterns are rarely perfect so a little imagination is required when you are looking for any of these patterns.
When a normal head and shoulders formation presents itself you might want to draw an imaginary line across the chart representing the neck line. Now when the stock price breaks down below this neck line it is usually viewed as negative for the stock and therefore we would expect the stock to head south.
The same rational can be applied when the chart is reversed and this pattern is usually known as an inverse head and shoulders formation as the chart above of gold shows.
Now if we take a close look at the chart we can see that the neck line has been broken and gold has indeed set off in a northerly direction, so we could say that the theory is being demonstrated by golds movement.
Another thing to notice is that once through the $1000/oz level which has been a resistance level for some time, gold returned to test this level and was supported. So what was once the resistance is now the support level, but we digress.
A good source of data regarding charting is StockChart.com so if you have a few minutes to pass, then its well worth familiarizing yourself with this site, just click the link.
Hope this helps if you are new to charting and if you are experienced in this area then please feel free to add your two cents worth.
Have a good one.
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