The price action remains roughly the same for both the head and shoulders top and bottom, but in a reversed manner. The biggest difference between the two is played by the volume. While an increase in volume on the neckline breakout for a head and shoulders top is welcomed, it is absolutely required for a bottom. Lets look at each part of the pattern individually, keeping volume in mind:

1. Prior trend: For this to be a reversal pattern it is important to establish the existence of a prior downtrend for this to be a reversal pattern. There cannot be a head and shoulders bottom formation, without a prior downtrend to reverse.

2. Left shoulder: It is formed after an extensive increase in price, usually supported by high volume. While in a downtrend, the left shoulder forms a trough that marks a new reaction low in the current trend. After forming this trough, an advance ensues to complete the formation of the left shoulder. The high of the decline usually remains below any longer trend line, thus keeping the downtrend intact.

3. Head: After the formation of the left shoulder, a decline begins that exceeds the previous low and forms a point at an even lower point. After making a bottom, the high of the subsequent advance forms the second point of the neckline.

4. Right shoulder: Right shoulder is formed when the high of the head begins to decline. The height of the right shoulder is always less than the head and is usually in line with the left shoulder, though it can be narrower or wider. When the advance from the low of the right shoulder breaks the neckline, the head and shoulders reversal is complete.

5. Neckline: The neckline is drawn through the highest points of the two intervening troughs and may slope upward or downward. The neckline forms by connecting two reaction
highs. The first reaction marks the end of the left shoulder and the beginning of the head. The second reaction marks the end of the head and the beginning of the right shoulder. Depending on the relationship between the two reaction highs, the neckline can slope up, slope down, or be horizontal. The slope of the neckline will affect the pattern’s degree of bullishness: an upward slope is more bullish than downward slope.

6. Volume: Volume plays a very important role in head and shoulders bottom. Without the proper expansion of volume, the validity of any breakout becomes suspect. Volume can be measured as an indicator (OBV, Chaikin Money Flow) or simply by analyzing the absolute levels associated with each peak and trough.

Volume levels during the second half of the pattern are more important than the first half. The decline of the volume of the left shoulder is usually heavy and selling pressure is also very intense. The selling continues to be intense even during the decline that forms the low of the head. After this low, subsequent volume patterns should be watched carefully to look for expansion during the advances.

The advance from the low of the head should be accompanied by an increase in volume and/or better indicator readings (e.g. CMF > 0 or strength in OBV). After the formation the second neckline point by the reaction high, there should be a decline in the right shoulder accompanied with light volume. It is normal to experience profit-taking after an advance. Volume analysis helps distinguish between normal profit-taking and heavy selling pressure. With light volume on the pullback, indicators like CMF and OBV should remain strong. The most important moment for volume occurs on the advance from the low of the right shoulder. For a breakout to be considered valid there needs to be an expansion of volume on the advance and during the breakout.

1. Neckline break: The head and shoulders pattern is said to be complete only when neckline resistance is broken. For a head and shoulders bottom, this must occur in a convincing manner with an expansion of volume.

2. Resistance turned support: The same resistance level can turn into support, if the resistance is broken. Price will return to the resistance break and provide a second chance to buy.

3. Price target: Once the neckline resistance is broken, the projected advance is calculated by measuring the distance from the neckline to the bottom of the head. This distance is then added to the neckline to reach a price target. Any price target should serve as a rough guide and other factors should be considered as well. These factors might include previous resistance levels, Fibonacci retracements or long-term moving averages.

Once the resistance is broken at point D the price target will be equal to the bottom of the head from neckline. It may test the line again at point E therefore the stop should be below the neckline.

Some important points to remember:

• Head and shoulder bottom is one of the most common and reliable reversal formations. They occur after a downtrend and usually mark a major trend reversal when complete.

• It is preferable but not a necessary requirement that the left and right shoulders be symmetrical. Shoulders can be of different widths as well as different heights. If you are looking for the perfect pattern, then it will take a long time to come.

• The major focus of the analysis of the head and shoulders bottom should be the correct identification of neckline resistance and volume patterns. These are two of the most
important aspects to a successful trade. The neckline resistance breakout combined with an increase in volume indicates an increase in demand at higher prices. Buyers are
exerting greater force and the price is being affected.

• As seen from the examples, traders do not always have to choose a stock after the neckline breakout. Many times, the price will return to this new support level and offer a
second chance to buy. Measuring the expected length of the advance after the breakout can be helpful, but it is not always necessary to achieve the final target. As the pattern
unfolds over time, other aspects of the technical picture are likely to take precedent.