Reverse head and shoulders is a trend reversal pattern. It will mark a desire to make a bullish reversal. The theory is the same as 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 around the same height. It’s said that they formed the shoulders. The second top is lower than the other thus representing the lowest point. This is the head. There are few rules for many investors say that the height of the head should be 1.5 or 2 times lower than the shoulders. Investors also agreed that spacing between each bottom has to be the same. This is a major point to identifying patterns.
The highest attained between the shoulders and the head shape the neckline (in red below) that acts as a resistance. The neckline 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 target price is equal in distance between the neckline and the bottom of the head that we symmetrically carry over to the neckline. This pattern is well known to investors and that is what makes it successful.
The reverse head and shoulders pattern offers a good performance on a bearish trend.
Some statistics about the reverse head and shoulders follows:
– In 98% of cases, there is an upward exit.
– In 97% of cases, there is a pursuit of the bearish movement at the breakout of the neckline.
– In 74% of cases, the target of the pattern is reached once the neckline is broken.
– In 52% of cases, a pullback occurs on the neckline.
The trend before the formation of the reverse head and shoulders is long, then the upward movement at the breakout of the neckline shall be strong.
The movement prior to the formation of the reverse head and shoulders is brutal, the upward movement at the breakout of the neckline will be very important.
Patterns with an descending neckline will give a better performance.
If the left shoulder is over the right shoulder, the pattern gives better performance.
Pullbacks on the neckline may be harmful to the performance of the pattern.