What does a head-and-shoulders chart pattern indicate?

A head-and-shoulders chart pattern is considered one of the most significant indicators of a trend reversal in technical analysis. This pattern typically forms after an uptrend and signals a potential shift in market sentiment from bullish to bearish.

The structure of the pattern consists of three peaks: the first peak (left shoulder), the second peak (head), and the third peak (right shoulder), with the right shoulder being lower than the head. When confirmed, a breakout below the neckline, which connects the lowest points of the two troughs, solidifies the potential for a downward trend.

Traders often look for this pattern as it alerts them to the possibility of a change in the direction of the market, allowing them to position themselves accordingly. The head-and-shoulders pattern’s reliability as a reversal signal is what makes it a key aspect of technical trading strategies.

In contrast, the other options represent different scenarios in market behavior. A continuation of a trend suggests that the current price movement will persist, while market volatility refers to the fluctuations within price levels, and increased trading volume indicates heightened activity but doesn’t inherently imply a change in trend direction.