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. Pattern

    A pattern, in finance terms, is a distinctive formation on a ...
  2. Double Bottom

    A double bottom pattern is a technical analysis charting pattern ...
  3. Diamond Top Formation

    A diamond top formation is a technical analysis pattern that ...
  4. Gartley Pattern

    The Gartley pattern is a complex chart pattern, based on Fibonacci ...
  5. Falling Three Methods

    The falling three methods is a bearish candlestick pattern that ...
  6. Breakout Trader

    A breakout trader is a type of trader who uses technical analysis ...
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

    Tesla Stock Is at Risk of a Major Breakdown

    Even Elon Musk has hinted that Tesla stock might be a bit pricey.
  3. 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.
  4. Trading

    Watch For These Chart Pattern Breakouts Right Now

    These stocks are near chart pattern breakout points, indicating potential trend reversals ahead.
  5. 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.
  6. Trading

    Goldman Sachs Stock: Potential Head and Shoulders Bottom Forming

    The possible reversal pattern occurs following the completion of a 20.5% decline and as the wider market is strengthening into new highs.
  7. Trading

    Tata Power Confirms Head and Shoulders Top

    Tata Power shares confirmed a long-term topping pattern and could be vulnerable to approximately 35% downside.
  8. Trading

    Introduction to Technical Analysis Price Patterns

    How to recognize price patterns that are key to technical analysis.
  9. Trading

    Amazon Showing Signs of Strain, Calls for Caution

    Given the developing chart pattern, Amazon is at risk of falling into the biggest correction in over one-and-a-half years.
  10. Trading

    Long-Term Traders Are Bullish on Commodities

    Bullish chart patterns on key commodity-related ETFs suggest that the remainder of 2017 could be the best time to buy.
RELATED FAQS
  1. 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 >>
  2. What Does It Mean When There Is 'Price Action'?

    Price action refers to the day-to-day fluctuation in the price of an asset. Read Answer >>
  3. How do I identify a stock that is under consolidation?

    Discover the three major characteristics stocks or securities exhibit when they are trading under a period of price consolidation. Read Answer >>
Trading Center