by in Public

The Inverse Head and Shoulders Pattern

Over the past couple of years, many references to the so-called “inverse” head and shoulders pattern have appeared:

The pattern (from TraderMike.net) is basically a head and shoulders “bottom” in an uptrend.

FROM TRADERMIKE.NET, MAY 11, 2011

I must have missed the memo because this pattern does not appear in Technical Analysis of Stock Trends:

Context Matters

Note the examples in Edwards & Magee always find the pattern preceded by a downtrend:

Anyway, this sort of thing happens all the time with candlestick patterns. It’s not just the pattern. The preceding price action actually sets the stage for the pattern.
But who am I to argue with this new piece of received wisdom? It’s not as if we will trade the pattern. If anything, we could trade it if it turns out to be a trap. For example, many will be expecting this pattern to resolve up. They will be long in anticipation of an upside move. If it doesn’t materialize, they will be trapped.

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  1. “…for there are many traders who are familiar with its name, but not so many who really know it and can distinguish it from somewhat similar price developments which do not portend a real Reversal of Trend.”
    Maybe people got burned so many times on ascending triangles breaking down and descending triangles breaking upwards, that they thought everything in Edwards & Magee was opposite now.

    • Could be, but then we’ve entered the part of the Keynesian Beauty Contest where, “It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.”

      • Reminds me of poker…what do I think he has? what does he think I have? what do I think he thinks I think he has? etc., etc.

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