What is a reverse head and shoulders formation?
A head and shoulders reversal is a trend pattern. It will mark a desire to make a bullish reversal. The theory is the same that a triple bottom other than the second bottom will be lower than the others, which are technically at the same height. The reverse head and shoulders pattern will be formed by three bottoms that will succeed. The first and third bottoms are approximately the same height. It is said that they formed the shoulders. The second top is lower than the second which represents the lowest point. This is the head. There are few rules because many investors say that the height of the head should be 1.5 or 2 times lower than the shoulders. Investors also agreed that the distance between each bottom must be the same. This is an important point for identifying patterns. The high reached between the shoulders and the head forms the neckline (in red below) which acts as a resistance. The neck line can be ascending (38% of cases), descending (40% of cases) or horizontal (22% of cases). This is the breakout of the resistance that validates the reversal patterns. The directional price is equal in distance between the neckline and the bottom of the head that we symmetrically bring across to the neckline. This pattern is well known to investors and that is what makes it successful. The reverse head and shoulders pattern gives a good performance on a bearish trend. Some statistics about the inverse head and shoulders follow: – In 98% of cases, there is an upward exit. – In 97% of the cases, there is a hunt for the bearish move at the breakout of the neckline. – In 74% of the cases, the target of the pattern is reached when the neckline is broken. – In 52% of cases, a retraction occurs in the throat. The trend before the formation of the inverted head and shoulders is long, then the upward movement at the breakout of the neck should be strong. The movement before the formation of the inverted head and shoulders is brutal, the upward movement at the breakout of the neck will be very important. Patterns with a downward neckline give better performance. If the left shoulder is above the right shoulder, the pattern gives better performance. Pull-backs in the neck can be detrimental to the performance of the pattern.
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