Inverse head and shoulders

What it is

The inverse head and shoulders is the mirror image of the head and shoulders. It forms after a downtrend and has three troughs: a left shoulder, a lower head, and a right shoulder that holds above the head. The rally highs between them form the neckline. The pattern completes when price closes above it.

Why it forms

In a downtrend each sell-off makes a lower low. The head is the last one. On the next drop — the right shoulder — sellers can no longer push price that far. That higher low shows buyers are absorbing the supply earlier than before.

The neckline marks where rallies were sold twice. Once price closes above it, traders who sold there are wrong, and some buy back. That added demand is what gives a clean neckline break its momentum.

How to identify it

• A clear downtrend before the pattern.
• Three distinct troughs, the middle one clearly the lowest.
• Shoulders of roughly similar depth. Symmetry helps but is not required.
• A neckline through the two rally highs, flat or slightly sloped.
• Volume often increasing on the rally from the right shoulder toward the neckline.

What confirms it

A candle close above the neckline, preferably on higher volume. Some traders wait for a retest: price dips back to the neckline, which now acts as support, and bounces.

What invalidates it

• Price falls below the right shoulder low before breaking out.
• After a breakout, price closes back below the neckline and stays there.
• A new low below the head — the downtrend is still intact.

Common mistakes

• Buying the right shoulder. Until the neckline breaks, the downtrend has not changed.
• Forcing the shape. Uneven, messy troughs with no clear head are not this pattern.
• Skipping the volume check. A quiet break on thin volume deserves less trust.
• Treating the measured move as guaranteed. It is a scale reference, not a forecast.