Inverse Head and Shoulders Patterns
Inverse head and shoulders patterns are a bullish pattern. It’s made up of a head and two shoulders. The left shoulder marks the first support level. As price rises, it goes up to make a new high, then it pulls back and falls below first support level, thus creating the head. Next up, price pulls back up to the left shoulder area, creating the right shoulder. Watch for neckline break above to confirm the breakout.
Table of Contents
What Are Inverse Head and Shoulders Patterns?
An inverse head and shoulders is an upside down head and shoulders pattern and consists of a low, which makes up the head, and two higher low peaks that make up the left and right shoulders. The right shoulder on these patterns typically is higher than the left but many of times it’s equal. Sometimes there’s a fake out which makes right shoulder lower than the left. Traders know that these patterns are major reversal patterns. They share many characteristics of their counterpart; the head and shoulders pattern. The difference being they’re upside down.
The inverse h & S pattern forms in a downtrend signaling a change in trend. In fact, inverse h&s patterns are pretty reliable in signaling a change in direction. Volume is an important part of the inverse head and shoulders.
The inverse head and shoulders patterns have a left shoulder, head, right shoulder and neckline. We sometimes call the head and shoulders pattern an F you pattern but there’s no secondary name for the inverse pattern.
Inverse head and shoulders patterns form in a major downtrend. When the pattern completes it marks the change in a trend. When the break out of the pattern occurs, sometimes there’s a large gap up. Other times you get the candlestick to run upwards.
Not every stock will employ that method but if the pattern completes and breaks up, you can take advantage of the moves up. This pattern forms in a down trend. Without a prior downtrend to reverse, you can’t have the inverse head and shoulders. The left shoulder forms making a trough with a reactionary low. As a result, it’s a new low in the trend. After the trough is made, price moves up. This completes the left shoulder formation of inverse head and shoulders patterns. The high that happens in the decline needs to stay below trend lines to keep the down trend in effect.
The head of the inverse h&s patterns forms a new low. In fact, it needs to be lower than the left shoulder. This is what differentiates it as the head.
After making the bottom, it needs to move back up and form another high. Sometimes in a down trend, when it’s going to turn, you might find hammer candlesticks. They’ve hammered out the base. Also known as the head as far as this pattern is concerned.
The high from the left shoulder and head are forming the neckline. The neckline is a key resistance level. If the high forming the neckline breaks the downtrend trend line, the strength of the downtrend can be called into question by other traders.
You’ve got that high from the head helping to form the neckline. As a result, you need price to fall once more to form the right shoulder. This low should be higher than the head. It’s usually in line with the low of the left shoulder. However, that might not always be the case with inverse head and shoulders patterns. Real life patterns aren’t always perfect looking.
Sometimes the right shoulder will be higher, lower, narrower or wider. Symmetry isn’t as important as the neckline break. Hence why the right shoulder is important.
For the pattern to be complete, you need that neckline break. Otherwise the right shoulder fails and you need to look at the candlesticks. Are they long legged doji candlesticks or high wave candlesticks?
Did inverted hammer candlesticks form? If the pattern breaks down usually the candlesticks are giving you warnings ahead of time.
The neckline is formed by connecting the reaction highs. You get these highs from the end of the left shoulder and the beginning of the head as well as the end of the head and beginning of the right shoulder.
In fact, you can connect them together with trend lines. The correlation between the two highs affects the patterns degree of bullishness. The neckline can slope up, down or be horizontal.
An upward slope of the neckline is going to be more bullish than if the neckline was sloped downward before the break.
Volume plays a critical role in the inverse head and shoulders patterns. Without volume you don’t get the breakout. If you don’t have enough volume, any breakout is suspect.
The pattern isn’t complete without the neckline break nor is the downtrend reversed. You need the resistance to be broken and then hold.
How to Trade Inverse Head and Shoulders Patterns
- Watch for first low to form which will end up being left shoulder
- Once first low is formed, watch for price to break below that level forming the head
- Next, look for price action to rise then fail back to left shoulder area
- Watch for right shoulder formation then hold support around left shoulder area
- Some traders that a long position at break above right shoulder using a close below as a stop
- The safest way to trade is take a long above neckline break using a close below right shoulder as stop
Inverse head and shoulders patterns have a key resistance level that needs to be broken. Once it is, price may come back to what is now support and test it to make sure it holds.