Trading's Inverse Head-and-Shoulders Pattern

Inverse head and shoulders patterns are used to forecast reversals in downtrends.

This pattern occurs when a security's price falls to a trough, falls below the previous trough, and then falls but doesn't reach the second trough.

After the final plunge, the price rises to the previous troughs' resistance.

What does inverted H&S mean?

When price rises over the neckline's resistance, investors go long. First and third troughs are shoulders; second peak is head.

A climb over the resistance level, or neckline, signals a quick upswing.

Traders await a volume spike to confirm the breakout. This inverse of the head and shoulders pattern forecasts downward trend movements.

Measuring the distance between the head's bottom and neckline predicts how far the price may travel in the breakout direction.

If the head and neckline are 10 points apart, the profit target is 10 points above the neckline.

Set a stop-loss order below the breakout price bar or candle. A conservative stop-loss order could be set below the inverse head-and-shoulders right shoulder.

Inverse head-and-shoulders has three parts:

After protracted bearish patterns, the price troughs and peaks.

The price drops to a second trough below the prior low, then increases.

The price falls a third time, but only to the initial low, before reversing direction.

Inverse Head and Shoulders

Inverse head and shoulders charts anticipate downtrend reversals.

A security's price peaks, declines, then climbs again, although not as high as the second peak. After the last high, the price falls toward former peaks' resistance.

Inverse Head-and-Shoulders disadvantages

The head and shoulders pattern's ups and downs tell a precise story about bulls and bears.

First drop and peak reflect negative trend momentum into first shoulder segment.

Bears try to push the price below the initial dip after the shoulder to a new low to prolong the bearish trend (the head).

Bears can retake market power and extend the downtrend.

Bulls will win when the price increases twice and surpasses the previous high.

Bears try again to drive the stock lower, but only reach the original low.

After bears fail to surpass the lowest low, bulls drive the price higher to complete the turnaround.