Canadian Securities Course (CSC) Level 2 Practice Exam

What term describes a pattern in technical analysis formed by a trend reversal consisting of a left shoulder, head, and right shoulder?

1. Continuation Pattern

2. Reversal Pattern

3. Support Level

4. Resistance Level

The correct answer is: Reversal Pattern

The correct answer is indeed a reversal pattern. In technical analysis, this specific formation is known as the "head and shoulders" pattern. It is characterized by three distinct peaks: the left shoulder, the head (the highest peak), and the right shoulder, which is similar in height to the left shoulder. The pattern signifies a potential reversal in the trend direction, where a prevailing bullish trend may be shifting to a bearish trend as the market sentiment changes. Recognizing this pattern allows traders to anticipate possible market movements and make informed decisions about entering or exiting trades. In contrast, a continuation pattern represents formations suggesting that the established trend will persist after a brief pause. Support and resistance levels refer to specific price levels where buying or selling pressure significantly affects price movements but do not imply a trend reversal by themselves.