BAJAJ BROKING
July 16, 2025
4 mins read
The Inverse Head and Shoulders is a well-known bullish reversal chart pattern in technical analysis. It indicates a possible reversal from a downtrend to an uptrend, enabling traders to expect increased buying. This pattern has three main elements: a lower low (the "head") between two higher lows (the "shoulders"), and all are centred around a resistance point called the neckline.
After the price crosses the neckline, it usually validates the trend reversal. The formation is utilised by traders to comprehend the psychology in the market because it indicates a reduction in selling pressure and also a slow re-emergence of bullish sentiment.
The inverse head and shoulders (or "head and shoulders bottom") is a bullish reversal chart pattern employed to expect a change from a downtrend to an uptrend. It is formed by three troughs:
Left shoulder: First low followed by a recovery.
Head: Deeper low indicating potential trend exhaustion.
Right shoulder: Higher low, signalling faltering bearish momentum.
When the price crosses above the neckline, connecting highs between lows, it establishes the reversal. Traders tend to go long at the breakout with a stop beneath the right shoulder.
Three falling highs, the second one being the lowest
Neckline as significant resistance-turned-support
A breakout above the neckline indicates a trend change
As an example, say there is a stock that had fallen to 200 INR to 150 INR (left shoulder), then picked up a little to 170 INR, and further moves to 130 INR (head), again picks up but then falls again. It drops back down to 145 rupees (right shoulder), and this creates a neckline that is approximated at 170 rupees.
After the price breaks out with a high volume above 170, that is: (170 - 130) = 40; 170+40 = 210. The traders can go long, place a stop loss just below 145, and target 210.
₹170 retest would establish support upon which to rally next, and it would be a good entry point.
Moreover, in the case of RHIM, Market analysts put their chart with an expected target of 833 and a stop-loss of 790, which worked out well, and the stock continued to break out.
This illustration demonstrates that the inverse head and shoulders pattern, combined with the confirmation of the volume, a crossover of major moving averages, and momentum indicators, offers a safe, data-driven model through which to engage in bullish trading.
Understanding this trend presupposes confirming some technical factors. First, make sure that the pattern comes out when the downtrend has lasted long, ensure there are lower highs and lower lows. The neckline is drawn by drawing a line between the peaks created below the left shoulder and the head. The reversal is confirmed by a strong move above the neckline, preferably accompanied by increased volume.
The reliability of the breakout is evaluated by traders with the help of volume; the higher the volume is during the breakout, the more confident it becomes. It is conservative to wait until the neckline is tested again as fresh support to enter in order to minimise false alarms. The stop loss is typically just below the right shoulder to control the risk, and the profit target is estimated by measuring the distance between the head to neckline and then adding it to the breakout point.
This pattern offers various advantages to traders:
Identified neckline breakout, stop-loss beneath shoulder, and quantifiable profit target.
An example, such as the Nifty index continuing with its breakout of an inverse head and shoulders formation, points to a strong market, and this strengthens the reliability of the trend.
Identified as one of the reliable reversal patterns.
Breakout on heavy volume provides confirmation.
Because the neckline is used as a trigger and support, and the measured move provides a quantifiable profit target, traders can set risk/reward ratios effectively.
The inverse head and shoulders pattern signals a shifting market mood:
Left shoulder development: Sellers are in control, but buyers soak up pressure momentarily.
Head formation: Sellers drive price lower, but falling volume signals waning bearish momentum.
Right shoulder: Sellers' efforts to drive price lower fail, which indicates buyer confidence.
Neckline: Symbolises shared investor uncertainty; a breakout signals a transition from fear to optimism.
Quietly, behind the scenes, initial build-up by knowledgeable traders during the head lays a foundation. As bearish pressure falters, additional participants feel more assured. A strong volume breakout reaffirms a crowd move into bullishness.
Successful strategies are:
Breakout entry: Long after the price closes above the neckline on increased volume.
Retest entry: Enter on pullback to the neckline—often provides a better risk-reward.
Stop-loss: Place just below the right shoulder.
Profit target: Employ the measured move method: head-to-neckline distance plus breakout level.
Partial profit-taking: Take parts of the profit at mid-target to limit volatility.
Using pattern signals with volume, RSI, MACD, or moving averages makes it more reliable.
Volume is key to formation and confirmation:
At the left shoulder, moderate selling pressure with sporadic higher volume.
As the head develops, selling pressure intensifies, but volume usually falls toward the base, indicating exhaustion.
The right shoulder develops on a lesser volume, indicating fewer sellers and growing optimism.
At the breakout point above the neckline, a major spike in volume is imperative; it substantiates institutional commitment and conviction.
Lacking volume confirmation, breakouts can be false. Volume validates the change in supply-demand balance:
Accumulation phase: Intelligent money is soaking up seller pressure in the head.
Confirmation phase: Conviction buyers push prices higher.
Support confirmation: Volume support on retest supports pattern validity.
Additionally, decreasing volume in the head is usually preceded by bullish divergence in RSI or MACD, indicating a weakening trend and providing further confirmation.
Source: Investopedia
Breakouts that turn out to be false, with the price briefly moving above the neckline (then falling back), are both frequent and expensive. Causes can be that the volume is not enough, myopic breakout entries, or market event overlaps.
These breakouts may cause stop orders and deceive the trader before the time. Such breakouts can be described as bull traps unless confirmed significantly.
Any failure on retest of the pattern due to price retesting the neckline, but then failing, makes the pattern invalid. Volume and price reactions should warrant the attention of traders and prevent damage.
To protect against fake breakouts:
Wait for close above neckline: Enter only after the complete candle closes above the neckline with an obvious volume spike.
Look for a retest: Enter on a successful bounce off the neckline, establishing support.
Use discipline in stops: Put stop-loss aggressively just below the right shoulder, not so tight that it is noisy.
Supplement with indicators: Employ RSI/MACD or volume oscillators for confluence, minimising whipsaw risk.
Trade small size: In risky settings, scale down position size before completing the full pattern.
These limits shield capital and ensure longer-term profitability.
The neckline test occurs when the price returns to the breakout point after the initial breakout.
This test confirms that the previous resistance becomes support. A solid bounce off this low, even on reasonable volume, confirms the bullish opinion.
In the event of a neckline failure (i.e., the price closes below the neckline), the pattern will be invalidated. The retest is the entry with a smaller risk point because the stop-loss tends to be tighter than the breakout entry and is usually positioned slightly beneath the neckline.
The timeframe counts: on the daily charts, retests are stronger than on shorter intervals, which are less accurate due to noise. The longer patterns may give stronger retests - people typically do it monthly.
The main profit target employs the measured move technique:
Calculate vertical distance: head to neckline.
Add that distance to the breakout price.
Illustration: Head at ₹130, neckline at ₹170 → ₹40. Breakout at ₹170 → target ₹210.
This method provides a clear, objective profit target that is consistent with pattern geometry.
Traders can choose to take half profits at the midpoint and trail stops higher to lock profits.
Additional signals can increase the levels of confidence:
RSI / MACD: Consider the existence of bullish divergence in the channel formation of the head-notice that price may have formed a lower low, yet the indicator does not.
Moving Averages: A breakout and an MA crossover (i.e., price above the 50-day MA) enhance the signal.
Volume Oscillator / OBV: Increasing on a breakout is confirmation of institutional demand.
Fibonacci: When Fibonacci levels become significant, creating shouldered levels in the 38.2, 50, and 61.8 per cent support field enhances an element of validity.
Bollinger Bands: A developing head closer to the bottom band is an indicator of oversold conditions and fatigue.
These indicators provide systematic corroboration and minimise the chances of misleading indications.
This pattern possesses many qualities that are crucial:
Reversal pattern: Change in signals whereby the bearish signals become bullish.
Symmetry: Neckline should be horizontal or downturned, and shoulders should be relatively equal.
Timeframe flexibility: Applicable to intraday to monthly charts, with the longer patterns having greater reliability.
The volume shape: Decrease in volume in the head and rise at breakout confirms institutional interest.
The trend both demonstrates and graphs the alteration of the supply-demand balances, with buyers dominating sellers.
The inverse head and shoulders is a strong and well-known reversal pattern that forms despite being bullish. With clear entry and stop rules, target indicators, and volatility confirmation, along with dynamic volume and compatibility with additional indicators, it offers a disciplined trader a high-probability formation.
However, there are strict conditions that lead to success: pattern symmetry, break-out confirmation, volume validation, and incident reporting. A properly applied use is a structured method for catching trend reversals using predetermined risk-reward criteria.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. Bajaj Broking Financial Services Ltd. (BFSL) makes no recommendations to buy or sell securities
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An inverse head and shoulders pattern screener is a program that scans markets for stocks or assets building the bullish reversal pattern to alert traders of possible buy opportunities.
The target is determined by measuring the vertical distance between the head and the neckline and extrapolating that same distance above the breakout point.
Yes, it is a bullish reversal pattern and shows a probable changeover from a downtrend to an uptrend.
Research indicates the pattern has a success rate of about 75% to 83% if confirmed with volume and other indicators.
Double bottom and inverse head and shoulders are two of the highest-accuracy reversal patterns when correctly confirmed.
Some common patterns are:
Head and shoulders (and inverse)
Double top and double bottom
Cup and handle
Triangles (ascending, descending, symmetrical)
Flags and pennants
Rectangles
This trend applies to instruments including stocks, indices, forex pairs, commodities, and even cryptocurrencies, as well as practically any liquid asset.
The pattern is effective on all timeframes; however, more solid signals are found on daily and weekly charts, as there is less noise and more solid trend confirmation.
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