Definition
The neckline is the trendline that connects the key reaction points of a reversal chart pattern, most famously the head-and-shoulders formation. In a head-and-shoulders top, it joins the two lows on either side of the head; in an inverse head-and-shoulders, it joins the two highs. It functions as the pattern's decisive boundary.
Until price closes through the neckline, the pattern is only potential. The break of the neckline is the event that confirms the pattern and signals that a reversal is underway, which is why analysts treat it as the line that activates the trade.
Why it matters
How it works
The neckline can slope up, down, or run flat depending on where the reaction points fall. A downward-sloping neckline in a top pattern is generally considered more bearish because it shows weakening demand even before the break.
To project a target, analysts measure the vertical distance from the extreme of the pattern, the head, to the neckline, then extend that distance from the break point in the direction of the new trend. Volume often increases on the break, lending it credibility, and a pullback to the neckline frequently follows before the move resumes.