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Thursday, December 3, 2009

Head and Shoulders Bottom Pattern

Head and shoulders bottom pattern, also known by the names inverted/inverse head and shoulders and Kilory bottom, is a very popular chart pattern indicating bullish market reversal. It is a long term pattern considered one of the most reliable patterns and looks just opposite to the head and shoulders top pattern.


Head and shoulders bottom pattern has stricter rules than head and shoulders top pattern. The requirements include,
  • Typically this pattern takes longer time to complete than head and shoulders top pattern.
  • The pattern must have three parts, two shoulders (ideally with the same depth and width) on two sides and a middle head containing the lowest price for the period.
  • The left shoulder is a price decline noticeable by high trading volume and then a price rise.
  • The head is also a price decline noticeable by high trading volume that goes deeper than the left shoulder and then a price rise.
  • The right shoulder is a price decline noticeable by a lighter trading volume and then a price rise noticeable by very high trading volume.
  • A horizontal/diagonal neck line is also drawn connecting the lows of shoulders, which serves as resistance.
Inverted head and shoulders pattern is not confirmed until the price closes below the neckline. This breakthrough should come with the highest trading volume (sharp burst of volume). Traders can take long positions once the pattern is confirmed and the neckline then serves as the immediate support level for the security. The pattern is considered more bullish when it has an upward neckline rather than a downward neckline.

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posted by NobleTrading at 5:24 AM

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