The inverse head and shoulders graphical price pattern serves as a sign of trend reversal and is expected to be followed by change in direction of the asset’s price. It is typically formed in a developed downtrend.
Formation
The pattern is characterized by three consecutive lows of the market price located at different levels: two higher bottoms (shoulders) aside and one lowest bottom (head) in between. There is also a neckline ( resistance) connecting pattern’s highs.
Interpretation of Inverse Head and Shoulders
When the pattern is formed and the price climbs above the neckline or resistance level (plus a certain deviation is possible), investors get a buy signal. The expectation is that the rally will continue, although prices may rebound to the neckline, considered now a support, but generally stop around it.
Target price
Following inverse head and shoulders pattern formation the price is generally believed to rise at least to its target level, calculated as follows:
T = N + (N – H), Where:T – target level;
N – neckline level (initial resistance);
H – pattern’s head level (lowest bottom).
You can see the graphical object on the price chart by downloading one of the trading terminals offered by IFC Markets.