The head and shoulders pattern is considered one of the most reliable indicators of a trend reversal, as it reflects a shift in market sentiment.

A head and shoulders pattern is a common chart formation that indicates a reversal of a bullish trend to a bearish trend in technical analysis. It consists of three peaks, with the middle one being the highest and the outer two being roughly equal in height. The pattern is completed when the price breaks below the neckline, a horizontal line connecting the two troughs between the peaks.

Exactly opposite to this, there is an “Inverse” or “Inverted” Head & Shoulder Pattern which is also a reversal pattern — but — a bullish reversal pattern.

The inverse head and shoulders pattern is the opposite of H&S  formation, signaling a reversal from a bearish trend to a bullish trend. In rare cases, this can also act as a continuation pattern; however, in most instances, this acts as a bullish reversal pattern, and for this pattern to be a valid one, an existence of a prior downtrend is a must.

Let us better visualize and understand this pattern in real-life scenario by applying it to this fine and speciality chemical stock.

Clean Science and Technology Ltd (CLEAN:NSE) has seen the development of an “Inverse Head & Shoulders” formation. If we look at the price analysis of CLEAN, after marking the high point near 1977 in September last year, the stock slipped under corrective retracement. The correction that followed not only saw the stock slipping below key moving averages, but it also went on to test the lows near the 1270 levels.

However, a higher bottom prior to this low and a higher bottom after this low point led to the formation of the Inverted Head and Shoulders. This formation took shape over the past two months; this remains a perfectly valid inverse H&S formation as it has developed following a steady downtrend.

While the stock remains under this formation and awaits a breakout, the OBV (On-Balance Volume) indicator has already hit a new high; this is bullish as it shows stock accumulation at lower levels and participation of volumes in the up-move.

The RSI, which can also be subjected to regular pattern analysis, shows a similar formation. Any breakout here along with or prior to the price breakout will have bullish implications for the stock.

Going by the classical price measurement implications, if this Inverse H&S pattern stages a breakout, the stock has the potential to test 1665 to 1700 levels over the coming weeks. 

A price target is measured by taking the distance from the neckline to the lowest point of the head and adding it to the breakout point.

A close below the left shoulder, i.e., below 1365-1360 would negate this technical setup.

Foram Chheda, CMT