UK Accounting Glossary
An inverse head and shoulders is a technical analysis charting pattern that signals the reversal of a downtrend — it’s a bullish reversal signal. Three valleys, with the middle valley being the lowest, and two peaks that touch a resistance level characterize an inverse head and shoulders pattern. This resistance level of the head and shoulders pattern is also called the neckline. Initially, selling pressure is strong when the trough of the left shoulder in the inverse head and shoulders forms. A relatively short advance completes the left shoulder of the inverse head and shoulders pattern. A new decline that reaches a through that is lower than the left shoulder, followed by another advance to resistance, forms the head of the inverse head and shoulders. Declining volume during the formation of the head in the inverse head and shoulders pattern can be another indication that selling pressure for a security is weakening. The right shoulder of the inverse head and shoulders pattern forms s through that is higher than the head and usually but not always in line with the left shoulder. Traders consider the inverse head and shoulders pattern reversal confirmed when the advance from the valley of the right shoulder in the inverse head and shoulders pattern breaks thru the neckline and does so on increasing volume. The target price for the inverse head and shoulders pattern is determined by first calculating the price differential between the neckline and the trough (i.e. the lowest price on the head). This price differential is then added to the neckline to determine the target price of the inverse head and shoulders pattern.
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This glossary post was last updated: 9th February 2020.