A head-and-shoulders bottom is a bullish signal that indicates a possible reversal of the current downtrend into a new uptrend in a security’s price.
A perfect example of the head-and-shoulders bottom has three sharp low points created by three successive reactions in the price of the financial instrument. It is essential that this pattern forms following a major downtrend in the financial instrument’s price.
Trading volume is absolutely crucial to a head-and-shoulders bottom. Traders should look for increasing volumes at the point of breakout. This increased volume definitively marks the end of the pattern and the reversal of a downward trend in the price of a stock.