Chart update - Now an inverse Head and Shoulders pattern
An inverse head and shoulders, or head and shoulders bottom, is a pattern used to predict a reversal of a downtrend. This pattern is identified through the following price ation:
- Share price falls into a trough and then rises, which fails to break higher (Shoulder 1);
- Share price falls again below the former trough and then rises again, but again fails to make a new high (Head);
- Share price falls again, but not as low as the second trough (Shoulder 2)
- There is now a resistance line with 3 touch points (Neckline). As the share price comes off the last trough, a break of the neckline occurs on high volume
Typically, investors reduce risk by waiting until a break of the neckline occurs on high volume, confirming validity of the pattern. As it is the opposite partner of a regular head and shoulders, this pattern is bullish.
As a current example we have TBH, which is starting to form the final trough, or 2nd shoulder. Neckline price is currently 40 cents. Those that are risk-averse will wait until 40 resistance is broken on high volume. Those trading aggressively and have a higher risk tolerance may buy as the pattern retraces to form the last shoulder.
As an example of a breakout occurrence is PPH. After a drawn out period, PPH formed an inverse head and shoulders pattern. While it did form up the 2nd shoulder, the share price continued to test the neckline resistance but failed and continued to consolidate. A breakout finally occurred much later when the company raised new capital to fund even more growth in their target market and announced significant upgrades to their forecasted guidance. A high volume break occurred and the share price gained 125% over the following months.
Remember, always set your stop losses and abide by them!
TBH vs PPH below:
View attachment 911657
View attachment 911663
