The Inverse Head and Shoulders — A Bullish Reversal Pattern

The Inverse Head and Shoulders is the mirror image of the Head and Shoulders top reversal pattern. It appears at the end of a downtrend and signals a transition to an uptrend. It is one of the most powerful and reliable reversal setups in all of technical analysis.

Anatomy of the Pattern

Left Shoulder: Price falls to a low, then rallies back to a resistance level (the neckline). This forms the left shoulder.

Head: Price falls again — this time to a lower low than the left shoulder (the “head”). This is the most extreme point of the downtrend. Price then rallies back to the neckline.

Right Shoulder: Price falls a third time, but this time only to a level similar to the left shoulder — higher than the head. The failure to make a new low shows that selling pressure is weakening.

The Neckline and Buy Signal

Neckline: A horizontal (or slightly angled) line connecting the two rally peaks between the three lows. When broken, it confirms the pattern.

Buy Signal: Generated when price closes above the neckline on increased volume. Volume is very important — a low-volume neckline break is less reliable.

The Retest

Retest: After breaking the neckline, price frequently pulls back to test it as support. This retest often offers a lower-risk entry opportunity.

Price Target & Stop Loss

Price Target: The distance from the neckline to the head (the deepest point), projected upward from the neckline breakout point.

Stop Loss: Place just below the right shoulder. If price falls back below the right shoulder, the pattern is invalidated.

Key Takeaway: The Inverse Head and Shoulders is a high-probability signal that a downtrend is ending. Look for three troughs with the middle being the deepest, a clear neckline, and a volume-confirmed breakout above that neckline to confirm the pattern.