The Inverse Head & Shoulders Pattern

The Inverse Head & Shoulders chart pattern is just opposite or the mirror image of the Head & Shoulders chart pattern discussed by us earlier. While a head and shoulders occurs in a uptrend and signals bearish move once the neckline is broken a inverse head and shoulders pattern signals a upcoming bullish move. Here is how a inverse head & shoulders will look like:



So, the major conditions in a inverse head and shoulders pattern are:

1) The stock should be in downtrend.
2) There is a formation of head and shoulders, with the shoulders at more or or less at the same levels and head deeper then both shoulders.
3) The pattern is completed once the price breaks above the neckline support and signals a bullish upmove.
4) Price target can be arrived by measuring the depth of head from neckline support.

Following charts will help you understand this pattern further:



In this chart all our conditions as mentioned are satisfied:

1) The stock is in downtrend before occurence of this pattern.
2) The formation of head and shoulders is there with the left and right shoulders at the same levels
3) The neckline support was broken and it turned bullish for targets equal to the depth of the head from the neckline support.



When ever such pattern occur we can go long as soon as the price breaks above the neckline with targets as labelled in above charts.



Here, I would like to put a final point, however it is one of the most reliable and popular method of spotting reversals but it may not work all the time. Once the price has crossed the neckline it must not break the neckline support again. So, it would be a good idea to place your stop loss slightly below the neckline support so that in case the pattern doesn't work out according to our expectations we can get squarred off at right time.

 As John Murply said, "one of the keys to survival in the financial markets is to keep trading losses small and to exit a losing trade as quickly as possible. The ability and willingness to quickly recognize trading errors and to take defensive action immediately are qualities not to be taken lightly in the financial markets."

Click Here to search head and shoulder formations in different stocks

Happy Learning
The Stock King
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4 comments

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anujcool
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March 7, 2015 at 11:14 AM delete

Bro...i am holding Ashok Alco Chem @102 levels ...should i book profits....
Can you please give your take on NIIT Ltd and Prozone Intu...

Thanks

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March 8, 2015 at 9:15 AM delete

bro hold ashok alco chem its our old reco given at 58 levels in december 2014, although it has achieved our targets of 110 but we are still bullish on it hold it for long term....................

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anujcool
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March 9, 2015 at 8:09 PM delete

Hi Abhi

Can you help me understand what's happening job waterbase it rise 10-12 % and the fall back again

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March 9, 2015 at 8:55 PM delete

bro as of now waterbase has support at 49.5 levels as long as these support levels are intact nothing to worry here............

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