Canadian Securities Course (CSC) Level 2 Practice Exam

What is the main purpose of the Head and Shoulders pattern in technical analysis?

1. To predict a change from an uptrend to a downtrend

2. To indicate a continuation of the current trend

3. To identify a strong support level

4. To signal a short-term price fluctuation

The correct answer is: To predict a change from an uptrend to a downtrend

The main purpose of the Head and Shoulders pattern in technical analysis is to predict a change from an uptrend to a downtrend. This pattern is formed when a security's price movement creates a baseline (the "shoulders") with higher peaks in between (the "head"). The completion of this pattern typically signals a trend reversal, indicating that the security's price is likely to move from an uptrend to a downtrend. This makes option A the correct choice. On the other hand, options B, C, and D are incorrect because the Head and Shoulders pattern is not used to indicate a continuation of the current trend, identify a strong support level, or signal a short-term price fluctuation.