THE INVERSE HEAD AND
SHOULDERS
The
head and shoulders bottom, or the inverse head and
shoulders as it is sometimes called, is pretty much a
mirror image of the topping pattern. There are three
distinct bottoms with the head (middle trough) a bit
lower than either of the two shoulders. A decisive close
through the neckline is also necssary to complete the
pattern, and the measuring technique is the same. One
slight difference at the bottom is the greater tendency
for the return move back to the neckline to occur after
the bullish breakout.
The
most important difference between the top and bottom
patterns is the volume sequence. Volume plays a much
more critical role in the identification and completion
of a head and shoulders bottom. This point is generally
true of all bottom patterns. It was stated earlier that
markets have a tendency to Ii fall of their own weight."
At bottoms, however, markets require a significant
increase in buying pressure, reflected in greater
volume, to launch a new bull market.
A
more technical way of looking at this difference is that
a market can fall just from inertia. Lack of demand or
buying interest on the part of traders is often enough
to push a market lower; but a market does not go up on
inertia. Prices only rise when demand exceeds supply and
buyers are more aggressive than sellers.
The
volume pattern at the bottom is very similar to that at
the top for the first half of the pattern. That is, the
volume at the head is a bit lighter than that at the
left shoulder. The rally from the head, however, should
begin to show not only an increase in trading activity,
but the level of volume often exceeds that registered on
the rally from the left shoulder. The dip to the right
shoulder should be on very light volume. The critical
point occurs at the rally through the neckline. This
signal must be accompanied by a sharp burst of trading
volume if the breakout is for real.
This
point is where the bottom differs the most from the top.
At the bottom, heavy volume is an absolutely essential
ingredient in the completion of the basing pattern. The
return move is more common at bottoms than at tops and
should occur on light volume. Following that, the new
uptrend should resume on heavier volume. The measuring
technique is the same as at the top.
The Slope of the
Neckline
The
neckline at the top usually slopes slightly upward.
Sometimes, however, it is horizontal. In either case, it
doesn't make too much of a difference. Once in a while,
however, a top neckline slopes downward. This slope is a
sign of market weakness and is usually accompanied by a
weak right shoulder. However, this is a mixed blessing.
The analyst waiting for the breaking of the neckline to
initiate a short position has to wait a bit longer,
because the signal from the down sloping neckline occurs
much later and only after much of the move has already
taken place. For basing patterns, most necklines have a
slight downward tilt. A rising neckline is a sign of
greater market strength, but with the same drawback of
giving a later signal.
The Inverse Head and Shoulders
and Neckline