Neckline
Candlefocus EditorThe neckline is composed of two elements which determine the position, slope and relevance of the line. This is the reaction highs or lows of a head and shoulders (H&S) or inverse head and shoulders (IH&S) pattern. In a simplified H&S pattern, the left shoulder is formed by the peak of the left shoulder and the low of the head. The right shoulder is formed by the peak of the right shoulder and the low of the head. In an IH&S pattern, the rising trend is reversed, so the left shoulder is formed by the low of the left shoulder and the high of the head, and the right shoulder is formed by the low of the right shoulder and the high of the head.
These two elements form the base of the neckline, but to avoid confusing multiple trends, the neckline needs to have a sharp and strong salient slope one direction or the other. If the neckline is neither up nor down, or the slope is neither steep nor shallow, it is considered an unreliable indicator and should be disregarded.
Once the neckline has been established, technical analysts can use it to signal various events in the market. When the price has reached a top and the neckline is broken to the downside, it signals that a sell position can be taken. Inversely, if the price has reached a bottom and breaks to the upside through the neckline, it signals a buy position. This indicates the reversal in the trend and predicts where the market will likely go in the near future.
The neckline is an essential tool in technical analysis when trading assets and can help traders identify when the market is about to move. Analysts must be mindful of the slope and sharpness of the line to ensure they do not confuse multiple trends. By using the neckline to identify when the market is at a top or bottom, traders can be better informed when purchasing or selling assets.