13. Inverse Head and Shoulders Pattern

The inverse head and shoulders pattern is a trend reversal formation, which predicts an uptrend turning into a downtrend. The inverse head and shoulders consists of three troughs, with the middle trough being the lowest (the 'head') and the two either sides being higher and roughly equal (the'shoulders').This pattern usually represents the strength of bulls taking over the bears, which failed to sustain price at a lower level. This second shoulder is considered a higher low. The neckline becomes the immediate resistance level for the sellers.

Once it breaks, the power of sellers is lost, and buyers start to accelerate their buying positions. The momentum of shorts is transformed into a new emerging trend on an upside. Aggressive and risky traders often take long trades at the close of the breakout candle and risk averse traders will wait for a retest of this broken neckline.

The psychology behind the inverse head and shoulders pattern is that the first trough represents panic selling driving the price down sharply. The second lower trough reflects short sellers taking profits after the rapid decline. The third trough shows buyers regaining control, absorbing the remaining selling pressure and pushing the price up, resulting in a trend reversal.

A 2018 study by Pornima Jain and Sanjay Sehgal, published in the Journal of Business and Economic Policy, found that this pattern had a 75% success rate in predicting trend reversals in the Indian stock market