Inverse Head and Shoulders

An Inverse Head and Shoulders, also known as a “Head and Shoulders Bottom,” is a reversal chart pattern. It resembles the traditional Head and Shoulders pattern but is inverted.

The pattern consists of three consecutive lows, with the middle low, referred to as the “head,” being the deepest, while the two outer lows, known as the “shoulders,” are shallower. Ideally, the two shoulders should be equal in height and width.

Upon completion, an Inverse Head and Shoulders pattern indicates a bullish trend reversal. Traders typically enter a long position when the price rises above the resistance level of the neckline.

The pattern initiates with a downtrend characterized by two lower lows (1 & 3) and two lower highs (2 & 4), forming the first and second bottoms. Point 5 creates a higher low, surpassing both points 3 and 1, which establishes the third bottom. This development suggests that the downward trend is nearing its end, although the reversal is confirmed when the price breaks through the neckline at point 6, moving above the previous high at point 4.

The pattern is validated once the price exceeds the neckline resistance and continues to rise (2 & 4). Volume trends mirror those of the Head and Shoulders pattern. Typically, volume peaks during the initial two declines (1 & 3) and then diminishes through the formation of the right shoulder (5). A surge in volume occurs as the price closes above the neckline, drawn between the two highs (2 & 4), confirming the trend reversal.

It is also important to note whether the decline into point 3 is less steep than that into point 1, and whether the drop into point 5 is less steep than that into point 3. If this occurs, it indicates that the bears are becoming less aggressive and that the downward momentum is waning, increasing the likelihood of a reversal.

When a Head and Shoulders formation appears in a downtrend, it signifies a significant reversal. Similar to the standard Head and Shoulders pattern, the strength of this reversal, measured by the rise following the breakout, is proportional to the decline that preceded the pattern. Stronger preceding trends are likely to result in more dramatic reversals.