The TSX is forming a rare Head & Shoulders top reversal patternA head and shoulders top is a common chart pattern in technical analysis that signals a potential reversal from an uptrend to a downtrend. Here’s how it works:
The Setup:
The price of an asset is rising in an uptrend.
The pattern forms as the price creates three peaks (or highs) with two valleys (or lows) in between.
The Pattern:
Left Shoulder: The price rises, then dips slightly.
Head: The price rises again, this time higher than the first peak, and then dips.
Right Shoulder: The price rises once more, but the peak is lower than the head. This is often close to the height of the left shoulder.
The Neckline:
Imagine drawing a line connecting the two dips (valleys) beneath the peaks. This is called the neckline.
The neckline can be flat, sloping upward, or downward.
The Signal:
When the price drops below the neckline after forming the right shoulder, it’s considered a breakout or a confirmation of the pattern.
This breakout suggests that the uptrend has ended, and the price may now move downward.
Why It Matters:
Traders often use this pattern to predict that the price will fall after the head and shoulders top forms.
The distance between the head and the neckline can help estimate how far the price might drop.
In simple terms:
A head and shoulders top looks like a person’s head with two shoulders on either side. It’s a warning sign that the price might stop going up and start heading down.
