Vertical Directional Cues: Head Related Transfer Function. Our head, shoulders and pinna modifies the sound which aids in locating its source. The resonances and reflections cause our head to believe it knows the vertical location of an object by how much these bands are present compared to the rest of the signal. IOW the vertical cues are essentially timbre modification. The illustration(s) below from Spatial Hearing by Jens Blauert demonstrates the principle:
And resonance caused by the pinna/ear canal
The first picture tells us the ear has trouble distinguishing what spectral information is coming from the source and what is caused by the Pinna and ear canal.
Horizontal Direction Cues: You have interaural time and level differences. At frequencies smaller than the head (approx 1500Hz), we mostly asses the level difference b/c of the head shadow. At frequencies lower than 800Hz, IOW significantly larger than the head, we assess the phase difference. These frequencies are not exactly set in stone and it is thought that there is a smooth/overlapping transition from one mechanism to the other.
A great article on the subject right here. Just click.