What is the Inverse Head and Shoulders Pattern?
The Inverse Head and Shoulders pattern is a typical trend reversal formation that appears at the end of a bearish trend, indicating a bullish setup. It is characterized by the formation of the left shoulder, head, right shoulder, and neckline. The pattern is confirmed when trading volume increases progressively at each low and the price effectively breaks through the neckline resistance.
How is the Inverse Head and Shoulders Pattern Confirmed?
The Inverse Head and Shoulders pattern consists of the left shoulder, head, right shoulder, and the neckline. Here are its characteristics and principles of operation:
- Left Shoulder: The formation of the pattern starts with the left shoulder, marking a relative low during a price decline. This is often accompanied by progressively increasing trading volume.
- Head: After the left shoulder, the price continues to fall, forming the head, which is usually lower than the left shoulder. Increased trading volume at this point can be a signal confirming the head formation.
- Right Shoulder: Following the head, the price rebounds and then falls again to form the right shoulder. The height of the right shoulder is usually close to that of the left shoulder but not identical.
- Neckline: After the right shoulder, the price rebounds again, trying to break through the neckline, a horizontal line that connects the lows of the left shoulder and the right shoulder. A breakout of the neckline is seen as a confirmation signal of the Inverse Head and Shoulders pattern.
- Trading Volume: In the Inverse Head and Shoulders pattern, trading volume is a crucial indicator. Volume progressively increases during the formations of the left shoulder, head, and right shoulder, especially a significant volume increase during the neckline breakout strengthens the pattern's reliability.
- Target Price: After the completion of the Inverse Head and Shoulders pattern, the price usually experiences a significant reversal. The target price is generally greater than the vertical height between the neckline and the lowest point.
How Long Does It Take for the Inverse Head and Shoulders to Form?
The time it takes for the Inverse Head and Shoulders pattern to form varies with market conditions and usually requires a significant period. In the stock market, the formation period generally exceeds one month; the longer the formation time, the higher the probability of establishing a sound base.
Generally, the longer the formation time of the Inverse Head and Shoulders, the smaller the dip after the breakout, as the base has been adequately consolidated. Conversely, the shorter the formation time, the greater the likelihood of a retest of the neckline after the breakout.
