An Inverted Head and Shoulders Chart Pattern occurs when a share price has declined to test a historic low within the last few weeks, months, or years.
However, the travel to that low share price in this Inverted Head and Shoulders Chart Pattern doesn’t follow a direct line down. Along the way it drops from a historically strong share price, on a diagonal path. It then tests a support level, bounces off that support level, and moves up a little bit. But the momentum to the upside doesn’t stick, and the share price declines again, on a diagonal line as you look at the chart. Taking out the previous level of support, the inverted head and shoulders chart pattern continues downward to test a historical low share price for the equity being traded. The left side of the chart represents the left shoulder and left side of the head of an inverted head and shoulder pattern
Something changes in the pattern
All of a sudden, something good happens for the underlying company. The share price starts to rise from its low, without spending too much time there, until it reaches the level of resistance even with the support and resistance established before by the left shoulder of the chart. The share price bounces off the resistance, back fills, and then rallies to another attempt at piercing through that resistance. Once it successfully takes out the resistance above, the share price continues to rise, again, in a diagonal direction, until it reaches the level of resistance that it fell from on the left side of the chart. The right side of the chart represents the right side of the head and the right shoulder of an inverted head and shoulders chart pattern.
The chart looks like somebody hanging upside down.
The thing to do when you see this pattern is to wait for the original historical high share price, represented by the high of the left shoulder, to be tested, and risen above. In most cases, once that level of resistance has fallen, the share price will continue to climb higher, because a long-term level of resistance has been taken out.