Technical Analysis 101: The Inverted Head and Shoulders

Chart patterns play an essential role in our success.

They highlight the chief driver of all stocks and indexes -- fear and greed.  They highlight the psychology of thousands of traders.  Ignoring that can be costly.

It’s why we’ve spent a good amount of time teaching pattern recognition with tops and bottoms, descending and ascending patterns, as well as how to recognize oversold and overbought conditions with relative strength (RSI), MACD, Bollinger Bands, Money Flow (MFI) and Williams’ %R (W%R).

While we’ll never be able to cover all of the patterns out there, we can always try.

In fact, here’s another pattern to understand – the inverted head and shoulders.


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The other week we discussed the typical head and shoulders pattern, which can help identify tops after a stock runs higher.  Much like that typical pattern, an inverted head and shoulders also has two shoulders and a head.

But this time, the inverted H&S appears at bottom of trend, and can be an indication of near-term reversal higher.  It’s also referred to as the H&S bottom, and is the exact opposite of the typical H&S pattern.

There are four points to watch with this one.

The left side of the pattern begins with a pullback with a rally to a new high.  This forms the left shoulder.  The formation of the head then begins when the price moves to a low below the previous low of the left shoulder followed by an eventual return to the previous high.  It may sound like an odd setup to trade but it’s reliable.

On completion, we now have a formation of a neckline at a double top.

The third point is the formation of the right shoulder, which includes a sell off from the neckline but to a low higher than the previous low of the head, followed by a return to the neckline.  The pattern is then complete when the price breaks above the right shoulder, telling us a rally may be in the cards.

Again, it may seem bizarre.  But if you look at charts with this pattern, you’ll see how profitable they can become for smart traders.


Learn High Probability Setups from Veteran Traders. Apply What
You've Learned and Get Paid To Trade! Learn How Here