Definition
Inverse Head and Shoulders is a technical analysis chart pattern that signals a potential reversal in the downward trend of a security or index. The pattern is identified by three valleys with the lowest (the head) in the middle and two higher ones (the shoulders) on either side. If the price breaks upwards past the pattern’s resistance line (the neckline), it indicates a possible bullish trend.
Phonetic
The phonetics of the keyword: Inverse Head And Shoulders is: “Inverse”: /ɪnˈvɜːrs/”Head”: /hɛd/”And”: /ænd/”Shoulders”: /ˈʃoʊldərz/
Key Takeaways
<ol> <li>Inverse Head And Shoulders is a trend reversal chart pattern that signifies the end of a downtrend and the beginning of an uptrend. It is distinguished by three troughs with the middle one being the deepest (the ‘head’), and the two on the side being shallower (the ‘shoulders’).</li> <li>The pattern is confirmed when the price breaks above the ‘neckline’ , which is drawn by connecting the high points after the left ‘shoulder’ and the ‘head’. A successful break above this point could indicate a significant bullish move.</li> <li>Market participants use the Inverse Head And Shoulders pattern for strategic entry and exit points. For example, traders may place their long entries after the successful break of the ‘neckline’ , and set their stop-loss orders below the lowest point of the right ‘shoulder’. The projected target price is usually equal to the distance from the ‘head’ to the ‘neckline’.</li></ol>
Importance
Inverse Head and Shoulders is an important term in business/finance as it is a key indicator used in technical analysis, offering potential signals for upcoming bullish market trends. It’s an inversion of the Head and Shoulders pattern, which signals a market downturn. Conversely, an Inverse Head and Shoulders pattern signals a market upturn, as it forms after a prolonged downtrend. This pattern typically involves three troughs: the middle one (head) greater than the two either side (shoulders). Its completion, when price crosses ‘neckline’ resistance, often leads to significant upward price movement. Thus, understanding this pattern can be vital for investors to accurately predict potential market trends and improve their decision-making process.
Explanation
The Inverse Head and Shoulders pattern is essentially a predictive chart formation, used in technical analysis, which helps to identify potential reversals in market trends. Rather than a continuous definition, its purpose chiefly resides in serving as a key indicator to traders and investors regarding the timing of their buying and selling decisions. Often utilized in stock or forex trading, it signals the end of a downward trend and the start of an upward one, marking a bullish reversal. Hence, it assists traders navigating volatile markets by providing a graphical representation of shifts in competitive prices, thereby enhancing their ability to capitalize on investment opportunities.Investors leverage the Inverse Head and Shoulders pattern to discern when prices are likely to alter their direction, earmarking a potential upswing. The breakdown of the pattern – into a left shoulder, a head, and a right shoulder – with the head being the lowest point, typically denotes a gradual decrease, a subsequent dip and finally an increase in price. The formation is fully confirmed once the price moves above the line drawn across the pattern’s highest points – known as the ‘neckline’. Once this price breach occurs, it’s generally regarded as a solid buy signal, inviting traders to take long position in anticipation of future price rise.
Examples
Inverse Head and Shoulders is a chart pattern used in technical analysis that predicts the reversal of a downward trend. In real-world examples, this pattern would appear in the stock price charts of individual companies, indexes, or commodities. Here are three such examples:1. Facebook (FB) in 2013: After its initial public offering, Facebook experienced a significant drop in its stock price. However, at the end of 2012 and throughout 2013, an Inverse Head and Shoulders pattern formed on its chart, indicating a trend reversal. True to the pattern, the Facebook stock price started to rise significantly immediately thereafter.2. Gold in 2016: Gold is a popular commodity used in technical analysis. In late 2015 and early 2016, Gold’s price chart showed a clear Inverse Head and Shoulders pattern indicating a bullish reversal. This came true as Gold’s price started an uptrend after the pattern was confirmed.3. S&P 500 in 2009: After the financial crisis of 2008, the S&P 500 index formed an Inverse Head and Shoulders pattern in March 2009. This signified a reversal of the previous bearish trend, leading to a prolonged bull run in the years following. Please be aware that while these patterns can often signal a potential reversal in trends, they are not guaranteed and should be used in combination with other technical and fundamental analysis tools for decision making.
Frequently Asked Questions(FAQ)
What is the Inverse Head And Shoulders pattern?
Inverse Head And Shoulders pattern is a chart pattern, commonly used in technical analysis in finance. It is used as a predictor for the reversal of a downward trend. It gets its name from visually appearing as a baseline with three peaks, the middle peak being the lowest.
How do I identify an Inverse Head And Shoulders pattern?
It consists of three parts – A left shoulder which is a price decline followed by a valley, a head which is a further price decline and deeper valley, and finally a right shoulder, with a price decline similar to the left shoulder but a valley similar to or higher than the left shoulder.
What does an Inverse Head And Shoulders pattern indicate?
It indicates a possible reversal of a downward trend in the market. When fully formed this pattern can give a strong buy signal if price moves above the neckline (resistance level).
What is the difference between Head and Shoulders and Inverse Head and Shoulders pattern?
While both the patterns signal a trend reversal, the direction of the reversal differs. A traditional head and shoulders pattern signals a reversal to a downward trend and it appears at the end of an uptrend. The inverse head and shoulders pattern, on the other hand, signals a reversal to an upward trend and it appears at the end of a downtrend.
How reliable is the Inverse Head And Shoulders pattern?
As with any chart pattern, it should not be used in isolation but with other indicators and techniques. The reliability also depends on the market conditions, the characteristics of the underlying asset, and the length of time that the pattern forms. However, it is widely regarded as a reliable predictor of trend reversal in a downtrending market.
How can I leverage Inverse Head And Shoulders in my trading strategy?
This pattern can be leveraged by setting up a buying position when a definitive movement above the neckline is observed. It can also assist in setting stop loss levels – a common strategy is to set these a little below the breakout point. The projected price target after a breakout is typically calculated as the distance from the neckline to the bottom of the ‘head’ , applied above the neckline.
Related Finance Terms
- Technical Analysis: This refers to the framework in which traders study price movement. Inverse Head and Shoulders is a technical indicator used in this analysis.
- Bullish Reversal: This term relates to a long-term increase in the price of a security or index after a period of decline. The Inverse Head and Shoulders pattern often indicates such a reversal.
- Support Level: This is the price level which a stock or market is expected to fall to, but doesn’t. The neckline in an Inverse Head and Shoulders pattern can act as a support level.
- Volume: This refers to the number of shares or contracts traded in a security or market during a given period. In an Inverse Head and Shoulders pattern, volume plays an important role in confirming the pattern.
- Breakout: This term refers to when a security’s price moves above a resistance level or below a support level on increased volume. A breakout is often seen upon the completion of the Inverse Head and Shoulders pattern.
