What Does the Inverse Head and Shoulders Pattern Mean in Trading?

An inverse head and shoulders pattern, also called a "head and shoulders bottom," looks like a regular head and shoulders pattern, but it is the other way around. The head and shoulders top is used to predict reversals in downtrends.

The price action of a security fits this pattern when it falls to a trough and then rises, falls below the previous trough and then rises, and then falls but doesn't reach the second trough.

As soon as the last dip forms, the price goes up until it hits resistance at the top of the previous dips.

What does "Head and Shoulders in the Wrong Direction" mean?

When the price goes above the resistance of the neckline, investors usually start to buy. The shoulders are the first and third dips, and the head is the second peak.

When the price goes above the resistance level, also called the "neckline," this is seen as a sign that the price will go up quickly.

A lot of traders are waiting for a big jump in volume to confirm the breakout. This pattern is the opposite of the well-known "head and shoulders" pattern and is used to predict changes in a downward trend.

A good profit goal can be found by measuring the distance between the bottom of the head and the neckline of the pattern and using that distance to guess how far the price might move in the direction of the breakout.

For example, if there are 10 points between the head and the neckline, the profit target will be 10 points above the neckline.

A stop-loss order could be set below the breakout price bar or candle in an aggressive way. A stop-loss order could also be put below the right shoulder of the inverse head and shoulders pattern, which would be a safer choice.

The three parts of an inverse head-and-shoulders pattern are:

After a long period of falling prices, the price drops to a low point and then rises to a high point.

The price goes down to a second low that is much lower than the first low, and then it goes back up.

The price goes down a third time, but only to the level of the first low point. The price then goes back up and the trend changes.

Head and Shoulders vs. Inverse Head and Shoulders

A traditional head and shoulders chart, which shows when an uptrend will end, is the opposite of an inverse head and shoulders chart.

This pattern happens when the price of a security goes up to a peak, drops, and then goes back up, but not as high as the second peak. After the last peak, the price keeps going down and is getting close to the resistance of the previous peaks.

Problems with a backwards Head and Shoulders

As with other charting patterns, the ups and downs of the head and shoulders pattern tell a very clear story about how bulls and bears are fighting.

The first drop and peak show that the negative trend from before is still going strong into the first shoulder segment.

Bears try to push the price below the initial trough after the shoulder to a new low because they want the downward trend to last as long as possible (the head).

At this point, it is still possible for bears to take back control of the market and keep going down.

But it won't be clear that the bulls are winning until the price goes up again and goes above the previous high.

Bears try again to push the stock price down, but all they can do is get it to the same low level as the first drop.

After the bears fail to break through the lowest low, the bulls take control and push the price up, completing the turn.