Inverse head-and-shoulder formation under development and positive volume balance

Inverse head-and-shoulder formations signal a reversal from falling to rising trends. By buying early, before a proper signal is triggered, the upside is big. There will be uncertainty as to whether the signal is really triggered, but a positive volume balance often indicates that buyers are aggressive.

Theory: Inverse Head-and-Shoulders is a trend reversal formation and signals a reversal from a falling to a rising trend, or in other words, the start of a rising trend. The idea is that the stock has been negative for a long time and that the focus has been on negative news and weak prospects. This causes investors in the left shoulder as well as the head to press the price to bottoms lower than previous bottoms. With the rise in the head, the price reaches the level of the previous top. In a falling trend, following tops should be lower, so this is an early signal that the falling trend is ending. When we see that the price in the right shoulder forms a bottom that is higher than the bottom in the head, we have an indication that a rising trend is starting. The confirmation is when the price breaks up through the neckline. This means that the following top also will be higher than the previous top. It can often be profitable to buy while the inverse head-and-shoulder formation is developing, since the price often rises quickly once the neckline has been broken.

Positive volum balance is an isolated indication that the trend is rising, or that a falling trend is ending. Therefore the risk/reward ratio is seen as attractive when both these circumstances occur at the same time, i.e. when we have an inverse head-and-shoulder formation developing and volume balance is positive.

Score: The quality of the formation and trend, i.e. the similarity to a theoretically perfect formation and trend, is important for calculation of the score. A price close to the bottom in the right shoulder gives a higher score than a price near the neckline. Volume balance and correlation between price and volume development are important contributors to the total score. It is positive is the price is well positioned related to horizontal support and resistance level, but this is not weighted much. Also, a low RSI is positive. If the formation is formed near the maximum in the chart, this lowers the score, because the price cannot have fallen much before the development of the formation. It is also negative is the formation is very big compared to the trend.

Buying price: Is set from the support in the right shoulder to halfway to the neckline.

Price target: The lower price target is set to the neckline and the upper price target is sett to the price target from the inverse head-and-shoulder pattern.

Stop loss: If the "shoulder height" is defined as the height between the support in the shoulders and the neckline, the stopp loss is set to 20 % of the shoulder height below the support in the right shoulder.

Time horizon: From 40 % (lower price target) to 120 % (upper price target) of the formation's length.