Learn the stock market › Candlesticks and patterns › Lesson 3 of 6
Head and shoulders
The shape
The price makes a peak, falls back, makes a higher peak, falls again and makes a third peak about as high as the first. The peaks are called the left shoulder, the head and the right shoulder. The lows between them form the neckline. The idea is that buyers managed to push the price to a new high once more, but not a third time.
The mirror image, the inverse head and shoulders, is three lows with the middle one lowest. It is said to show that a fall is over.
The rule we used
A chart pattern is more a matter of interpretation than a candlestick pattern, so here is exactly what we counted.
Peaks and lows. A close that is the highest of the ten trading days before and the ten after is a peak, and the lowest is a low. So a peak can only be seen ten days later. Two peaks in a row without a low between them count as one, the higher.
The pattern. Three peaks with lows between them, where the head is at least 3% above the higher shoulder and the shoulders are within 5% of each other. The neckline is the lower of the two lows. Many draw it as a sloping line through both lows, but a level line can't be read two ways.
Complete. The pattern counts when the price closes below the neckline within 60 trading days after the right shoulder can be seen, unless it has first closed above the head.
The target. Textbooks say the price should then fall at least as far below the neckline as the head stood above it.
A real example
The latest pattern among the 20 companies with at least a month after it came in Costco. The left shoulder was on Apr 9, 2026, the head on May 19, 2026 and the right shoulder on Jun 16, 2026. The price closed below the neckline of $944.62 on Jul 1, 2026, which put the target at $796.65.
Costco: head and shoulders, Apr 9, 2026 to Jul 1, 2026
CostcoThe neckline
Three months later the price had gone +0.1%.
What happened afterward?
We counted every pattern in the 20 largest US companies since 2010. Held means the price had fallen after a head and shoulders, and risen after the inverse shape. Ordinary period is how often the same company fell or rose over the same length of time from any day.
| Pattern | Times | Held | Ordinary period |
|---|---|---|---|
| Head and shoulders, 1 mo | 58 | 36.2% | 38.8% |
| Head and shoulders, 3 mo | 58 | 25.9% | 32.1% |
| Inverse head and shoulders, 1 mo | 69 | 71.0% | 61.6% |
| Inverse head and shoulders, 3 mo | 69 | 78.3% | 68.6% |
And the target? Reached target means some close in the three months after was at or beyond it. Ordinary day is how often the same company, from any day, got as far in the same direction within three months. The middle target was 14.1% from the price when the pattern was complete.
| Pattern | Times | Reached target | Ordinary day |
|---|---|---|---|
| Head and shoulders | 58 | 8.6% | 14.7% |
| Inverse head and shoulders | 69 | 39.1% | 36.1% |
None of the differences can be told apart from chance. After a head and shoulders the price fell about as often as it usually does, and the target was reached about as often as an ordinary day got as far.
The pattern isn't common under this rule: 58 times in 20 companies since 2010. Other limits, such as five days instead of ten, find more patterns and different ones.
Test yourself
A stock has made three peaks with the middle one highest and now closes below the neckline. What do you know?
More numbers are on the Costco stock page.