Head-and-Shoulders Pattern

A “head and shoulder” chart pattern looks like a shoulder, then rising to form a head, and then another shoulder; there is also an “inverted head and shoulders” pattern. The “head and shoulder” formation to track stocks (or the stock market) has been cited in print since at least 1932.

The “head and shoulders pattern” was not named after the Procter & Gamble anti-dandruff shampoo “Head & Shoulders” (first introduced in 1961).
 
 
Wikipedia: Head and shoulders (chart pattern)
The Head and Shoulders formation is one of the most well known reversal patterns.

On the technical analysis chart, when a price trend is in the process of reversal either from a bullish or bearish trend, a characteristic pattern takes shape and is recognized as reversal formation.
 
Formations
Head and Shoulders Top and Head and Shoulders Bottom is discussed below.
 
Head and shoulders top
Head and Shoulders formation consists of a left shoulder, a head, and a right shoulder and a line drawn as the neckline. The left shoulder is formed at the end of an extensive move during which volume is noticeably high. After the peak of the left shoulder is formed, there is a subsequent reaction and prices slide down to a certain extent which generally occurs on low volume. The prices rally up to form the head with normal or heavy volume and subsequent reaction downward is accompanied with lesser volume. The right shoulder is formed when prices move up again but remain below the central peak called the Head and fall down nearly equal to the first valley between the left shoulder and the head or at least below the peak of the left shoulder. Volume is lesser in the right shoulder formation compared to the left shoulder and the head formation. A neckline is drawn across the bottoms of the left shoulder, the head and the right shoulder. When prices break through this neckline and keep on falling after forming the right shoulder, it is the ultimate confirmation of the completion of the Head and Shoulders Top formation. It is quite possible that prices pull back to touch the neckline before continuing their declining trend.
 
Head and shoulders bottom
This formation is simply the inverse of a Head and Shoulders Top and often indicates a change in the trend and the sentiment. The formation is upside down in which volume pattern is different than a Head and Shoulder Top. Prices move up from first low with increase volume up to a level to complete the left shoulder formation and then falls down to a new low. It follows by a recovery move that is marked by somewhat more volume than seen before to complete the head formation. A corrective reaction on low volume occurs to start formation of the right shoulder and then a sharp move up that must be on quite heavy volume breaks though the neckline.
 
Another difference between the Head and Shoulders Top and Bottom is that the Top Formations are completed in a few weeks, whereas a Major Bottom (Left, right shoulder or the head) usually takes a longer, and as observed, may prolong for a period of several months or sometimes more than a year.
 
Investopedia
What Does Head And Shoulders Pattern Mean?
A technical analysis term used to describe a chart formation in which a stock’s price:
 
1. Rises to a peak and subsequently declines.
2. Then, the price rises above the former peak and again declines.
3. And finally, rises again, but not to the second peak, and declines once more.
 
The first and third peaks are shoulders, and the second peak forms the head.
 
12 March 1932, New York (NY) Times, “Topics in Wall Street,” pg. 21:
With the Chart Students.
Several days ago, when the stock market seemed about to break out of its dull trading range into a brisk upward movement, a commentator remarked that the chart showed that a quadruple bottom had been established and that the formation was that of an irregular “head and shoulders” bottom, which is regarded by most chart students as a sign of an impending bull market. As a result of the decline during the last three sessions, however, this authority remarked yesterday that one of the shoulders had sustained a slight dislocation.
 
18 November 1938, Olean (NY) Times-Herald, “Financial Gossip” by Elmer C. Walker (United Press Financial Editor), pg. 5, col. 6:
AVERAGE
One commentatator notes that the average is working out a “head and shoulders” formation. The left shoulder was formed late in October and the head formation last week when the market made new highs for the year. This commentator says the right shoulder formation is now in the process of formation, a process, he indicates, which might be followed by a substantial rally.
 
Google Books
Where are the customers’ yachts? or, A good hard look at Wall Street
By Fred Schwed
New York, NY: Simon and Schuster
1940
Pg. 47:
It is his claim that he can discern in this jagged line a pattern of behavior which reproduces itself and that certain of the peaks, valleys, and wobbles tell him when it is about to do it again. His technical jargon contains such phrases as “head-and -shoulders formation,” “double tops,” “double bottoms,” and “breakaway gaps.”
 
Google Books
Technical Analysis of Stock Trends
By Robert D. Edwards and John Magee
Springfield, MA: Stock Trend Service
1948
Pg. 63:
Without doubt, some of you have already suspected that the Head-and-Shoulders pattern is, in a sense, just an adaptation of the principles of DowTheory to the action of an indiidual stock. So it is.
Pg 70:
Curiously enough, the “power” of a Multiple Head-and-Shoulders pattern is more apt to be over- than under-estimated.
     
Google Books
The Stock Market
By Charles Amos Dice and Wilford John Eiteman
New York, NY: McGraw-Hill
1952
Pg. 223:
A head and shoulders top.
(...)
A head and shoulders bottom is the same as an inverted top. That is, the head and shoulders hang, and the formation is interpreted to mean that the next movement is to be a rally.
   
Google Books
Managing Securities:
The basic principles of investment
By Sidney M. Robbins
Boston, MA: Houghton Mifflin
1954
Pg. 501:
Area patterns commonly include head and shoulders, triangles, rectangles, and flags and pennants.
 
Google Books
The Stock Market
By George Leland Leffler
New York, NY: Ronald Press Co.
1957
Pg. 546:
If lines are drawn a certain way, a coil may appear; if another, a rectangle; if another, a pennant; if another, a head-and-shoulders formation.
Pg. 566:
Chart Formation. To give an idea of the elaborations developed by chartists, here are some types:
Head-and-shoulders top
Head-and-shoulders bottom
   
Google Books
The Seven Fat Years:
Chronicles of Wall Street
By John Nixon Frooks
London: Gollancz
1959
Pg. 149:
“That’s a head and shoulders, which Bob Edwards used to call the basic formation in chart interpretation,” Magee said, frowning.
 
Chartists have a language all their own, based on the patterns that show up on their charts; their conversations are littered with terms like “inverted bowl,” “end run,” “head and shoulders,” “neckline,” “coil,” “cradle,” “dormant,” ...
 
17 September 1964, Cleveland (OH) Plain Dealer, “Bafflegab on Wall St. Can Be Befuddling” by Sylvia Porter, pg. 31, col. 2:
SOME IS defiantly befuddling: for instance, when a broker tells you a “head and shoulders pattern on a point and figure chart” forecasts a break in the price of a stock, it means this is the technical interpretation of a series of pricec hanges in a specific stock which he has charted on a piece of graph paper.
 
Google Books
Survey of Investments
By Donald E. Vaughn
New York, NY: Holt Rinehart and Winston
1967
Pg. 335:
The pattern resembled a head and shoulders top within the rectangle, which is a bearish pattern.
 
OCLC WorldCat record
Evaluating chart-based technical analysis : the head-and- shoulders pattern in foreign exchange markets
Author: P H Kevin Chang; Carol Lee Osler; Federal Reserve Bank of New York.
Publisher: New York, N.Y. : Federal Reserve Bank of New York, [1994]
Series: Research paper (Federal Reserve Bank of New York), no. 9414. 
Edition/Format:  Book : English
 
OCLC WorldCat record
Head and shoulders : not just a flaky pattern
Author: Carol Lee Osler; P H Kevin Chang; Federal Reserve Bank of New York.
Publisher: New York, N.Y. : Federal Reserve Bank of New York, 1995.
Series: Staff reports (Federal Reserve Bank of New York), no. 4. 
Edition/Format:  Book : English
 
OCLC WorldCat record
Identifying noise traders : the head-and-shoulders pattern in U.S. equities
Author: Carol Lee Osler; Federal Reserve Bank of New York.
Publisher: New York, N.Y. : Federal Reserve Bank of New York, 1998.
Series: Staff reports (Federal Reserve Bank of New York), no. 42. 
Edition/Format:  Book : English
 
OCLC WorldCat record
Are technical trading rules profitable? Evidence for head-and-shoulder rules
Author: Bernd Lucke
Publisher: Taylor & Francis
Edition/Format:  Article : EN
Publication: Applied Economics, 35, no. 1 (2003): 33-40
Database: ArticleFirst
Other Databases: British Library Serials
 
OCLC WorldCat record
The Predictive Power of “Head-and-Shoulders” Price Patterns in the U.S. Stock Market
Author: Gene Savin; Paul Weller; Jåanis Zvingelis
Publisher: Oxford University Press
Edition/Format:  Article : English
Publication: Journal of Financial Econometrics, 5, no. 2 (2007): 243-265
Database: ArticleFirst
Other Databases: British Library Serials
 
CNBC
Scary ‘Head and Shoulders’ Pattern Emerges in S&P Chart
Published: Thursday, 4 Aug 2011 | 3:21 PM ET
By: Patti Domm
CNBC Executive News Editor
The recent selloff in stocks has triggered a scary “head and shoulders” pattern in the S&P 500 chart, signaling that there may be more selling to come.
 
The so-called head and shoulders pattern is formed when the chart pattern shows three rallies, with the middle rally peaking higher than the first and second, thus creating a head. If the market breaks the “neckline,” that is a trend reversal signal and can mean more selling ahead.
 
Business Insider
All Kinds Of “Head-And-Shoulders” Patterns Popping Up All Over the Place
Simone Foxman | Oct. 2, 2011, 9:34 AM
Since we pointed out the head-and-shoulders pattern some analysts say has developed over the month of September, we’ve received a number of responses on other head-and-shoulders patterns that could be developing in the S&P right now.
 
Two other patterns — both long-term — could also be in the works right now, according to readers are into technical analysis.

First, one model (via Allan Dereniwsky) suggests the S&P has seen a head-and-shoulders forming since April 2009, with a shoulder developing in May 2010, and the model coming to a head around May 2011.
   
Business Insider
The Market Breaks Its Neck
Lance Roberts, Street Talk Live | Oct. 4, 2011, 5:34 AM
For the second time this year the market has broken the neckline of a classical “head and shoulders” pattern.  For you non-technical investors this is simply a pattern of price movement that has been indicative of market topping patterns in the past.  In fact, outside of the two times this year, the last time we witnessed a clearly defined “head and shoulders” pattern was at the peak of the market in 2008 just before the major crisis hit.