Inverse head and shoulders patterns are bullish patterns. The pattern forms a head and two shoulders. The left shoulder marks the first support level. As the price rises, it reaches a new high, then pulls back and falls below the first support level, thus creating the head. Next up, the price returns to the left shoulder area, creating the right shoulder. Watch for the neckline break above to confirm the breakout.
What Is an Inverse Head and Shoulders Pattern?
An inverse head and shoulders is an upside-down head and shoulders pattern, consisting of a high that forms the head, and two lower high peaks that form the left and right shoulders.
The right shoulder on these patterns is typically higher than the left, but it’s often equal. Sometimes, there is a fake-out, which causes the right shoulder to be lower than the left.
Traders know that these patterns are major reversal patterns. They share many characteristics with their counterpart, such as the head and shoulders pattern. The difference is that they’re upside down.
The inverse H&S pattern forms in a downtrend, signaling a change in trend. They are reliable in signaling a change in direction. Volume is a crucial component of the inverse head and shoulders pattern.
Not every stock will increase in price; this is why there are two sides to trade. Short traders can employ this method. However, if the pattern completes and breaks up, scalpers on both sides can take advantage of the quick moves up while the pattern fluctuates before confirming a trend that will continue.
This is an example of an inverse head and shoulders pattern. Traders would enter a long position on the bullish candlestick that broke above the neckline. They would place their stop loss below the right shoulder area. The top area signaled a bearish trend, which could have been the start of a head and shoulders pattern.
KeyTakeaways
- The pattern consists of three distinct lows, with the middle low (the head) being lower than the two adjacent lows (the shoulders).
- The lows are connected by a trendline called the neckline, usually sloping downwards.
- The inverse head and shoulders pattern suggests going from a downtrend to an uptrend.
- Market sentiment is shifting from bearish to bullish.
- Traders typically wait for the price to break above the neckline to confirm the pattern before they enter.
Inverse Head and Shoulders Basics
Inverse head and shoulders patterns form in a major downtrend. When the breakout of the pattern occurs, a large gap may form. The inverse head and shoulders pattern consists of a left shoulder, head, right shoulder, and neckline. This pattern forms a downtrend without a prior downtrend to reverse, known as the inverse head and shoulders.
The left shoulder forms, making a trough with a reactionary low. As a result, a new low in the trend has been reached. After the trough forms, the price moves up; the high in the decline must remain below the trend lines to maintain the downtrend. The left shoulder formation of the pattern is completed.
The head forms a new low. It must be lower than the left shoulder, differentiating it from the head.
After making the bottom, it must move back up and form another high. Sometimes, in a downtrend, look for hammer candlesticks for a sign of a possible bounce or reversal. Once a base is established and confirmed, it is known as the head of the pattern.
The height from the left shoulder to the head is measured from the neckline; this is a key resistance level. If the high forming of the neckline breaks the downtrend line, the strength of the downtrend can be called into question.
Inverse Head and Shoulders Pattern Trading Strategy
- Watch for the left shoulder; first low to form.
- Once the first low is formed, watch for the price to break below that level, forming the head.
- Next, look for price action to rise, then fail back to the left shoulder area.
- Watch for right shoulder formation, then hold support around the left shoulder area.
- Some traders take a long position at a break above the right shoulder using a close below as a stop.
- A more cautious way to trade is to take a long above-the-neckline break using a close below the right shoulder as a stop.
Right Shoulder
In an inverse head and shoulders, the head’s high helps form the neckline. As a result, the price needs to fall to form the right shoulder. The shoulder should be positioned higher than the head, typically in line with the height of the left shoulder.
However, real-life patterns are not always perfect, so it is up to the trader to gather information from tools and charts to help make informed trades.
Sometimes, the right shoulder will be higher, lower, narrower, or wider. Symmetry is not as important as the neckline break.
The right shoulder is important for the pattern to be complete. It needs that neckline break. Otherwise, the right shoulder fails, and we must look at the candlesticks to determine whether they are long-legged doji candlesticks or high-wave candlesticks.
If an inverted hammer candlestick form, the pattern breaks down. These candlesticks are giving warnings ahead of time of what might happen next.
Neckline
The neckline in an IHS pattern is formed by connecting the reaction highs. Get these highs from the end of the left shoulder, the beginning of the head, the end of the head, and the beginning of the right shoulder.
They can be connected with trend lines. The correlation between the two highs affects the degree of bullishness in the pattern. The neckline can slope up, down, or be horizontal.
An upward slope of the neckline will be more bullish than a downward-sloping neckline before the break.
Neckline Break
Volume plays a critical role in the inverse head and shoulders patterns. Without volume, there is no breakout. If there is not enough volume, any breakout is suspect.
The pattern is only complete with the neckline break, and the downtrend needs to be reversed. Resistance needs to be broken and then held.
Inverse Head and Shoulders Examples
This is an inverse head and shoulders on a daily chart. Note the highlighted areas and the angular resistance area that went over the right shoulder. Once the price broke out, it formed a bullish trend.
TrendSpider Tool
This is an inverse head and shoulders chart created using the TrendSpider tool. This pattern consists of a falling wedge that forms the head. Then, a rising wedge formation formed the right shoulder area.
Inverse Head and Shoulders Breakdown
This is an example of an inverse head and shoulders breakdown on a 5-minute intraday chart. Note that the pattern formed when the price was falling intraday. Often, when a bullish pattern, such as an inverse head and shoulders, is forming while the price is falling, the pattern will resume its bearish direction.
This was the case with the example in the chart. You’ll notice that the inverse head and shoulders weren’t really clean, especially with the right shoulder area. However, you’ll see that the price never broke above the neckline area. So, the pattern resembled an inverse head and shoulders; however, it never broke out. Price action failed to break the neckline resistance area and formed a falling wedge pattern after the market hours.
Final Thoughts on Inverse Head and Shoulders
Inverse head and shoulders patterns have a key resistance level that needs to be broken. Once it is, the price may return to what is now supported and tested, ensuring it holds. Use proper risk management techniques when trading inverse head and shoulders patterns.
Frequently Asked Questions
The head and shoulders reversal pattern is a bearish indicator. The opposite is the bullish inverse head and shoulders pattern.
An inverse head and shoulders is a bullish pattern. It's the reversal of a downtrend. This pattern represents a bullish breakout.
Often, the inverse head and shoulders pattern features a rising neckline. Traders enter a long position once the price breaks above the top of the neckline.
