Inverted head and shoulder pattern
The inverted head and shoulder pattern is the reverse of the head and shoulder pattern. It’s formed at the bottom of the downtrend. It has three bottoms that look like three V’s. They’re called the left shoulder, head, and right shoulder.
We’ll explain each of the three parts.
- Left shoulder – In the left shoulder, price falls and rises to the neckline to form a V shape.
- Head – In the head, price falls and rises to the neckline to form a bigger V shape bottom.
- Right shoulder – The right shoulder is similar to the left shoulder.
The above chart shows the inverted head and shoulder pattern for a NASDAQ stock.
Why the pattern is formed
The inverted head and shoulder pattern is formed in the downtrend. It’s formed because of the change in how investors perceive the stock or the stock market. The stock is trading very low. This drives some investors to buy the stock. The stock prices rise to form the pattern’s left shoulder.
The downtrend drives the stock down. Investors buy the stocks because they anticipate that the trend will reverse. The stock price increases. The psychological or fundamental factors drive the stock prices. As a result, the head of the pattern is formed.
The stock corrects and reaches the same bottom level as the left shoulder. Since it’s at the support level, it rises back to the neckline level—or resistance level. This forms the right shoulder. The right shoulder is approximately the same height as the left shoulder.
In this pattern, a breakout above the neckline will result in an uptrend.
The inverted head and shoulder pattern, along with volume, is used to identify trends’ market bottoms. It’s also used to plan the trading strategy for the entry and exit signals.