An inverse Head and Shoulders pattern is a reversal pattern and for the pattern to be reliable, it should occur in a downtrend. A downtrend is reversed at the left shoulder and buyers drive prices back up to the neckline. Sellers then push prices down to the head and buyers drive prices back to the neckline again. Any sellers who are remaining are only able to push prices back to the right shoulder before buyers step in and drive prices through the neckline.
Trading the pattern: The neckline of this pattern can be determined by drawing a trend line through the highest high of the left shoulder and the head. Traders should watch how prices at the right shoulder react to the neckline. Should prices push through the neckline and close above that level, it is a signal for bullish entry. Conservative traders who want to avoid getting in on a false breakout can wait to enter long on the retest of the neckline, if prices cannot close below the neckline, traders can look to enter long.
Measuring the move: The distance between the price at the head and the neckline is marked A. A is then added to the confirmation line after the break out, what this means is that an upward price movement from the breakout point the height of the pattern can be expected.
To contact the editor, e-mail: