Head & Shoulders Pattern

The Head and Shoulders pattern is one of the most reliable reversal patterns in technical analysis. It consists of three peaks: a left shoulder, a higher central peak (the head), and a right shoulder that is roughly equal in height to the left shoulder. The lows between these peaks form the 'neckline,' which serves as the critical support level. When price breaks below the neckline after forming the right shoulder, it signals a trend reversal from bullish to bearish.

The measured move target for a Head and Shoulders pattern is calculated by measuring the distance from the head to the neckline and projecting that distance downward from the breakout point. For example, if gold forms a Head and Shoulders pattern with the head at $2,100 and the neckline at $2,050, the target would be $2,000 ($50 below the neckline). Volume typically increases on the neckline break, confirming the pattern.

The inverse Head and Shoulders (a bullish reversal pattern) forms at the bottom of downtrends with three troughs: a left shoulder, a deeper central trough (the head), and a right shoulder. A break above the neckline signals a reversal from bearish to bullish. This pattern has been historically significant in gold, often appearing at major cycle lows before sustained multi-month rallies.