Psychology of Inverse Head and Shoulders Pattern....
The psychology of the inverse head and shoulders pattern is explained next: The head and shoulder bottom pattern occurs during a downtrend, with the left shoulder being an additional lower low for the downtrend. The first peak after the left shoulder is just another expected short-term retracement up in a downtrend. From there prices continue moving downward and make yet another lower low (creating the head). So far the inverse head and shoulders pattern is not a head and shoulders pattern at all; it is just a lower low, with a short retracement upward and a second lower low in a downtrend. However, problems begin to arise either at the second retracement peak or the right shoulder bottom.
For an upward sloping neckline, the second peak created by the retracement after the head's lower low is far higher than expected. Since the second peak is a higher high and one definition of a downtrend states that prices make lower lows and lower highs, technically the downtrend is over and a new uptrend could be beginning. The right shoulder bottom being higher than the head bottom confirms the potential end of the downtrend because now there is a higher high and a higher low, one of the main definitions of an uptrend.
However, for downward sloping neckline inverse head and shoulders pattern, the second peak created by a retracement up from the head bottom is still a lower high and suggests that the downtrend is still intact. Not until the right shoulder fails to make a lower low do traders begin to worry. When the neckline is broken above on a downward sloping neckline on the inverse head and shoulders pattern, essentially the downward sloping resistance line of the prior downtrend has been broken.
Inverted Head and Shoulders Upward Breakout Price Target: Breakout Price + ((Neckline Price - Lowest Price in Head) * 74%)
Traits that Increase the Inverted Head and Shoulders Pattern's Effectiveness
The psychology of the inverse head and shoulders pattern is explained next: The head and shoulder bottom pattern occurs during a downtrend, with the left shoulder being an additional lower low for the downtrend. The first peak after the left shoulder is just another expected short-term retracement up in a downtrend. From there prices continue moving downward and make yet another lower low (creating the head). So far the inverse head and shoulders pattern is not a head and shoulders pattern at all; it is just a lower low, with a short retracement upward and a second lower low in a downtrend. However, problems begin to arise either at the second retracement peak or the right shoulder bottom.
For an upward sloping neckline, the second peak created by the retracement after the head's lower low is far higher than expected. Since the second peak is a higher high and one definition of a downtrend states that prices make lower lows and lower highs, technically the downtrend is over and a new uptrend could be beginning. The right shoulder bottom being higher than the head bottom confirms the potential end of the downtrend because now there is a higher high and a higher low, one of the main definitions of an uptrend.
However, for downward sloping neckline inverse head and shoulders pattern, the second peak created by a retracement up from the head bottom is still a lower high and suggests that the downtrend is still intact. Not until the right shoulder fails to make a lower low do traders begin to worry. When the neckline is broken above on a downward sloping neckline on the inverse head and shoulders pattern, essentially the downward sloping resistance line of the prior downtrend has been broken.
Inverted Head and Shoulders Upward Breakout Price Target: Breakout Price + ((Neckline Price - Lowest Price in Head) * 74%)
Traits that Increase the Inverted Head and Shoulders Pattern's Effectiveness
- Larger the price decrease prior to pattern, greater the price reversal
Patterns with downward sloping lines perform best
Patterns with upward sloping lines perform best
Higher left shoulder than right increases performance