Financial Literacy Investing

Inverse Head and Shoulders Chart Explained

BY Greg Thompson | CMT®, Portfolio Manager | Aug 16, 2022

As a Chartered Market Technician (CMT®), I use technical analysis to evaluate investments and identify trading opportunities by analyzing statistical trends and charts gathered from trading activity. I then recommend trades from a variety of financial instruments and markets.

Historical trading activity and price changes of a security can be invaluable indicators of a security’s future price movements. Charts are regularly used when observing the market to predict future performance.

Last quarter, we discussed the Head and Shoulders chart pattern in relation to the indication and depiction of bullish-to-bearish trend reversal and as a signal that an upward trend is coming to an end. 

Let us explore another common type of chart pattern: Inverse Head and Shoulders.

The inverse head and shoulders pattern is an inverted version of the standard head and shoulders pattern.  The key difference is that this type of chart pattern is typically used to predict a bearish-to-bullish trend reversals.  It also signals that a downward trend is nearing its end.  This pattern is identified by the following characteristics:

  • After long bearish trends, the price of a security falls to a trough (a stage in the business cycle where prices are bottoming before a rise) and then rises;
  • The price falls substantially below the first trough and then rises again;
  • Finally, the price falls again, but only to the level of the first trough

Once the final trough is made, the price rises on an upward trend toward the resistance found near the top of previous troughs, reversing the trend.

Spectrum Wealth Management, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Additional information about Spectrum’s investment advisory services is found in Form ADV Part 2, which is available upon request. The information presented is for educational and illustrative purposes only and does not constitute tax, legal, or investment advice. Tax and legal counsel should be engaged before taking any action. The opinions expressed and material provided are for general information and should not be considered a solicitation for purchasing or selling any security.