JPM – JPMorgan Daily Chart – a close over the right shoulder will negate the head and shoulders pattern and trigger a buy signal.

Also, of note in the chart, is the formation of the moving averages (21-day blue over the 50-day red), which appear poised to cross and turn bullish.

Typically a head and shoulders pattern would decline from the head to the neckline, and then make a failed attempt at a new high in the form of the ‘right shoulder’. Selling pressure comes on to the market at that point, returning the price back to the neckline. Should the neckline break, the stock will be officially in a bearish phase. This is comparable to the Dow Theory, where a series of lower highs signal that a down trend is in place.

In the case of JPM, in the chart below, the neckline was broken briefly. The price then subsequently returned to the highs of the right shoulder, and, if a close over that right shoulder occurs, then the series of lower highs will no longer be in effect. This gives us our buy signal. Negated or uncompleted head and shoulders patterns can be quite bullish.

Let’s see what happens…