Welcome to Bravechart. Your in-depth article on chart analysis from a Scotsman stationed in the Outback.
As traders, we use technincal analysis as a reliable method for speculating on future price direction of both equities (shares) and indexes. Technical Anyalysis in simple terms is the study of historic price movements in a chart in search of patterns or consistantly traded support and resistance levels. Today we are looking at a specific chart pattern that falls under “Reversal Patterns”, the Inverse Head and Shoulders.
Appearance: An Inverse Head and Shoulders is comprised of:
- Bearish movement to a support level creating the first (Left) Shoulder.
- The subsequent rise to a resistance level, creating what is known as the ‘Neckline’.
- The bearish fall after hitting the Neckline with the share price breaking through the Left Shoulder support level and creating a lower support level – this is called the Head.
- The rise back to the Neckline, then a fall back to roughly the ‘Left Shoulders’ support level where it reverses once again (Right Shoulder).
- The final part of the Head and Shoulders to be complete, the break of the Neckline, and a reversal in the long-term trend.
Bullish Reversal Pattern: The Inverse Head and Shoulders can be a very reliable bullish reversal pattern. You can see that after the share price has the fallen to create two support levels, it eventually rises through the neckline and then confirms the reversal in trend, and the bullish move higher. Often, it can be the beginning of an uptrend and is often more reliable when it occurs after a keen fall. Often it is considered a longer-term reversal pattern rather than a short term one.
Important Note: The Inverse Head and Shoulders is not confirmed until the Neckline has been broken.
Example: S&P/ASX 200
XJO has been falling for a while now, and may have rached the bottom at the end of December. With the market looking like a perfect example of an Inverse Head and Shoulders, we are potentially starting to see break out of this and the reversal from bearish to bullish and a rise back up to 5,950 may be seen. This move may not be seen for a while, but the XJO does look like we will start to rally up to sideways for the short-term, and hopefully won’t break back below the ‘shoulders’. With the US/ China trade deal coming to a meeting, Brexit nearing a key decision, and the Australian market coming up to reporting season, we may see this bullish sentiment continue.
There are many ways that you could take advantage of these patterns. As a specialist in derivatives, we are able to profit on a stock when it falls as well as when it rises.
If you would like to learn how to pick a stocks direction, then Join us at our live face to face one day “Technical Analysis, Picking the Direction of a Stock” course.
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