What is a 'Neckline'

The neckline is a level of support or resistance found on a head and shoulders pattern that is used by traders to determine strategic areas to place orders. Each peak of a regular head and shoulders pattern falls toward a support level, also known as a neckline, before it rises to create the next peak. A move below the neckline (in the case of a head and shoulders top) is used by traders as a signal of a reversal of the current uptrend.

BREAKING DOWN 'Neckline'

The neckline is the part of the head and shoulders chart pattern that connects the two reaction lows to form an area of support or resistance. The head and shoulders chart pattern is commonly used to predict bullish or bearish reversals depending on whether it forms upward or in reverse (e.g. reverse head and shoulders, or head and shoulders bottom).

The neckline's slope can be drawn at a slight angle rather than horizontal, but it should remain more or less horizontal to be valid. Regardless of its slope, a move below the neckline of a regular head and shoulders pattern is always used as a signal of a downtrend. In the case of an inverse head and shoulders, the neckline is found as a level of resistance that has prevented the price from heading higher. A move beyond the neckline in this case would be used to signal the start of an uptrend.

Often times, the head and should pattern is used in conjunction with other forms of technical analysis that serve as confirmation, including other chart patterns or technical indicators. For example, traders may look at momentum indicators to see whether the neckline of a head and shoulders pattern will hold or whether there will be a reversal (e.g. making it a false breakdown or false breakout).

Neckline Example

The following chart shows an example of a head and shoulders pattern neckline for Take-Two Interactive Software Inc. (NASDAQ: TTWO).

Head and Shoulders Neckline Chart Example

In the chart above, a head and shoulder chart pattern emerges between October 2017 and April 2018. The neckline is drawn between the two reaction lows formed throughout the pattern. After the breakdown occurs, the trendline serves as a key area of support and resistance on an ongoing basis, including when the stock broke back above those levels in May and rebounded​​​​​​​ from them in June. Traders may have also looked at momentum indicators or other factors to see if the neckline resistance would hold in May when the pattern turned out to be a false breakdown.

Chart courtesy of StockCharts.com.

RELATED TERMS
  1. Inverse Head And Shoulders

    An inverse head and shoulders, also called a head and shoulders ...
  2. Chart Formation

    A chart formation is a graphical depiction of a stock's price ...
  3. Rising Bottom

    Rising bottom is a pattern on a security's chart, considered ...
  4. Double Top

    A double top is a chart pattern, characterized by two consecutive ...
  5. Confirmation On A Chart

    Confirmation on a chart is the term used to describe a chart ...
  6. Gartley Pattern

    The Gartley pattern is a complex chart pattern, based on Fibonacci ...
Related Articles
  1. Investing

    4 Stocks With Bullish Head and Shoulders Patterns for 2016 (PG, ETR)

    Discover analyses of the top four stocks with bullish head and shoulders patterns forming in 2016, and learn the prices at which they should be considered.
  2. Trading

    Inverse Head and Shoulders Patterns Breaking Out

    Watch for higher prices if these stocks complete inverse head and shoulders patterns (a bottoming pattern).
  3. Trading

    Dollar Bulls Have Something to Look Forward to

    After a steady slide, it looks like the U.S. dollar is poised to bounce back.
  4. Trading

    Facebook Stock May Complete Head and Shoulders Top

    Facebook may succumb to growing controversy, completing the last stage of a head and shoulders breakdown that targets the $130s.
  5. Trading

    Wait for $170 to Buy Facebook Stock

    Facebook stock has made a rapid recovery to February's bull market high and could now turn lower, testing new support at $170.
  6. Trading

    United Technologies Stock Nears Major Breakout

    Dow component United Technologies could break 2015 resistance in coming weeks and head toward $160.
  7. Trading

    Stock Chart Patterns to Keep an Eye On

    Some of these stocks are exhibiting big chart patterns, so a breakout is likely to be significant.
  8. Trading

    How Commodities Hit Their Bull Run

    The leading index that tracks commodities reached a key downside objective before beginning its current bullish trend.
  9. Trading

    Goldman Sachs Breaks Down from Head & Shoulders

    Goldman Sachs recently broke down from its head and shoulders pattern, which could spell a larger fall for the iconic investment bank.
RELATED FAQS
  1. What are the differences between patterns and trends?

    Learn the difference between a pattern and a trend. Explore how technical analysts use patterns and trends to identify trading ... Read Answer >>
  2. What are the differences between a bar chart and candle sticks?

    Explore the difference between bar and candlestick charts. Learn how technical analysts use charts in the analysis of supply ... Read Answer >>
  3. What does the three black crows pattern mean?

    Learn the basics of the three black crows pattern and how analysts and traders interpret this bearish reversal pattern when ... Read Answer >>
Trading Center