Trading glossary
Neckline
By the PatternX team · Published
Definition
A neckline is the line connecting the reaction lows (or highs) between the peaks (or troughs) of a reversal pattern such as head and shoulders or a double top; a break through it completes the pattern.
How it works
In a head and shoulders top, price makes three peaks with the middle one highest. Between them sit two reaction lows, and the line through those lows is the neckline. In the inverse head and shoulders, the neckline joins the two reaction highs instead. In a double top or double bottom, it is usually a horizontal line at the single low (or high) between the two extremes.
A neckline can be flat or sloped. With two reaction points:
A neckline that slopes down under a top is generally read as a weaker market than one that slopes up, because sellers are already pushing reaction lows lower.
Why it matters
The neckline is both the trigger and the ruler. A decisive break through it is the usual sign that the reversal is underway; until then, the structure is only a possible top or bottom. The distance from the head (or the peaks) to the neckline is the height used for the measured move. After the break, price sometimes returns to test the neckline from the other side.
Example
For example, suppose a stock forms a head at $60 with shoulders near $56, and the reaction lows on either side of the head are $50 and $51. The neckline rises gently and sits near $50.50 beneath the head, so the pattern height is about $9.50. By the time price breaks down, the rising line has reached $51.20, which projects a target near $41.70. A recovery above the right shoulder at $56 would undermine the setup.
Common mistakes
- Selling before the break. Until price closes through the neckline, the pattern isn't complete; many never are.
- Forcing a flat line onto sloped lows. Draw the line through the actual reaction points.
- Measuring from the wrong place. Take the height at the head, then project it from the breakout.
How PatternX uses it
For head and shoulders, PatternX draws a sloped neckline through the first and last troughs between the shoulders (peaks, for the inverse) and needs a fresh close through it on the newest bar, a bar that may not have finished yet. The pattern's stop is the right-shoulder price, and its target projects the head-to-neckline distance from the entry. For double tops and bottoms, the neckline is the deepest opposite swing between the two extremes and must sit at least 2% from their average; for triple tops and bottoms, it is the shallower of the two pullbacks. See pattern detection.