Home/Blogs/Understanding the Significance of Inverse Head and Shoulders

Understanding the Significance of Inverse Head and Shoulders

11 Dec 2023

Introduction

Inverse head and shoulders pattern is one of the most reliable and popular chart patterns. It is basically a bullish reversal chart pattern. It signals a possible end of a downtrend and a start of an uptrend. It is also known as the head and shoulders bottom pattern. The reason is it is the opposite of the head and shoulders top pattern, which is a bearish reversal pattern.

This pattern has three troughs (or lows) and a neckline connecting the two shoulders' high points. The first trough is called the left shoulder, the second and the lowest troughs are called the head, and the third and highest troughs are called the right shoulders. The neckline is a horizontal or slightly sloping line that acts as a resistance level for the price.

Start Investing with Free Expert Advice!

Decoding the Inverse Head and Shoulders Pattern

  • The left shoulder represents the initial selling pressure that drives the price lower. The price reaches a low point and then bounces back to the neckline, where it meets some resistance from the sellers.
  • The head represents the extreme pessimism and panic that causes the price to make a new lower low. The price reaches a lower point and then rebounds to the neckline, where it faces more resistance from the sellers.
  • The right shoulder represents the diminishing selling pressure and the increasing buying interest that pushes the price higher. The price reaches a higher low and then rallies to the neckline, challenging the sellers' resistance.
  • The neckline represents the resistance level that the price has to overcome to confirm the trend reversal. The neckline is also the breakout point that triggers the buying frenzy and the bullish momentum.

How to confirm the inverse head and shoulders pattern?

The inverse head and shoulders pattern is invalid until a breakout above the neckline confirms it. The breakout should come with a noticeable rise in volume, showing strong buying pressure and ensuring the reversal of the trend. The price should also close above the neckline, not just touch or pierce it briefly.

Not all inverse head and shoulder patterns are perfect; some may have variations or deviations, such as:

  • Sloping neckline: It can be either ascending or descending. An ascending neckline is more bullish than a horizontal one, signifying that the buyers are more aggressive and willing to pay higher prices. A descending neckline is less bullish than a horizontal one. It shows that the sellers are still dominant and can lower prices.
  • Complex head or shoulders: It can have multiple peaks or valleys within them. It shows that the sellers are trying hard to lower prices, but the buyers are equally strong in defending the support level. A complex shoulder can show that the buyers are struggling to break the resistance level, but the sellers are losing their momentum and are unable to make new lows.
  • False breakout: This can occur when the price breaks above the neckline but then reverses and falls below it. A false breakout can indicate a trap or a manipulation by the market participants. A false breakout can also signify a weak or delayed trend reversal, which may require another breakout attempt or a pullback to the neckline to confirm the pattern.

Therefore, it is essential to use other technical analysis tools, such as trendlines, support, and resistance levels, moving averages, indicators, and oscillators, to validate the inverse head and shoulders pattern and confirm the trend reversal. For example, you can use a trendline to draw the downtrend line that connects the lower highs of the price before the pattern. A break of the downtrend line can further confirm the trend reversal. You can utilize a moving average to gauge the overall direction of the price. A crossover of the price above the moving average can be another confirmation of the trend reversal.

Conclusion

The inverse head and shoulders is a powerful and profitable chart pattern that can help you spot a trend reversal from a downtrend to an uptrend. It consists of three troughs and a neckline that act as a resistance level. It is confirmed by a breakout above the neckline with a high volume and a close above it. It means the market sentiment has changed from bearish to bullish, and buyers have taken over the market. It can provide you with entry.

 

Related Articles:  What is a Rising Wedge Pattern And How to Trade With It | How to Use the ADX Indicator to Trade Like a Pro

 

Popular Stocks:  HDFC Bank share price | ICICI Bank Share Price | UPL Share Price | Tata Consumer Share Price | Divislab Share Price

Checkout more Blogs

You may also like…

Get Exclusive Updates

Be the first to read our new blogs

Intelligent investment insights delivered to your inbox, for Free, daily!

Open Demat Account
I wish to talk in South Indian language
By proceeding you’re agree to our T&C
Click here to see your activities