In the context of investing, what does a “head and shoulders” pattern signal?

A “head and shoulders” pattern is a technical analysis indicator that is used to predict a reversal in the current trend of an asset's price. This formation typically appears at the peak of an uptrend and consists of three peaks: a higher peak (the head) between two lower peaks (the shoulders). The presence of this pattern signals that the upward momentum is weakening and that a reversal to a downtrend is likely to follow.

Traders and analysts often look for this pattern as a signal to sell or short the asset, as it suggests that the prevailing bullish trend is about to end. Conversely, the inverted head and shoulders pattern, which appears at the bottom of a downtrend, signals a potential bullish reversal.

Understanding this pattern allows investors to make more informed decisions about when to enter or exit positions based on expected future price movements. The recognition of the head and shoulders pattern plays a critical role in strategies focused on trend reversals in the market.