The inversed head-and-shoulders pattern on the Bitcoin chart is seen by cryptocurrency and stock traders as a precursor to a bullish trend reversal.
All traders strive to buy low and sell high, but only a select few have the fortitude to go against the grain and buy when a downtrend reverses direction, as has happened in recent years.
The inverse head and shoulders (IHS) pattern can arise during periods of decreasing prices when sentiment is negative and anxiety is at excessive levels. It is during these periods that the inverse head and shoulders pattern might appear.
The (IHS) pattern is constructed in a manner identical to the conventional H&S top pattern, with the exception that the configuration is inverted. When the (IHS) pattern is completed, it denotes the conclusion of the downtrend and the beginning of a new upward trend.
The Inversed head and shoulders basics
The (IHS) pattern is a reversal configuration that develops after a downtrend has occurred. It is comprised of a head, a left shoulder, and a right shoulder that is all positioned below the neckline and upside down. Complete the setup by breaking out above the neckline and maintaining that level, suggesting that the downtrend has been reversing.
Despite the fact that the asset is in a downtrend, value buyers believe the price has reached attractive levels and will begin bottom fishing as a result of the huge decrease that has occurred. When demand outstrips supply, the asset forms the first dip from the left shoulder and the price begins to rise in response to the pressure on supply.
When the market is in a downtrend, traders sell on rallies. In response to the pullback, bears sell furiously, causing the price to sink below the first trough and therefore producing a lower bottom. Bears, on the other hand, are unable to take advantage of this weakness and reverse the downward trend.
The bulls take advantage of this weakness and launch a relief rally, forming the head of the pattern. As the price approaches the previous high point, where the rise had come to a halt, the bears once again intervene.
When this happens, the market begins to drop and eventually forms the third trough, which is almost exactly in line with the first trough because buyers are anticipating a turnaround and purchasing aggressively. The right shoulder of the setup is formed by this piece. Once again, the price rises, and this time the bulls are successful in pushing it above the neckline, so completing the pattern.
Following that, the neckline becomes the new floor, as traders purchase the decline to this level of support. This marks the beginning of a new upward trend.
Using the (IHS) pattern to spot a fresh rise
Due to the extreme formation of a local top at $13,970 on June 26, 2019, Bitcoin (BTC) has been in a downtrend since then. The buyers stepped in and stopped the drop in the $7,000 to $6,500 support zone, resulting in the formation of the left shoulder of the (IHS) chart pattern.
After that, there was a relief rally, which brought the price up to $10,450. When prices reached this level, short-term bulls took profits and short-term bears opened short positions in an attempt to re-launch the decline.
On March 13, 2020, aggressive selling shattered the support level of $6,500, causing the Bitcoin/Tether (USDT) pair to plummet to $3,782.13. The bulls saw this decline as a buying opportunity, and as a result, they launched a robust relief rally that brought the market close to $10,450. The head of the setup was formed by the second trough of the arrangement.
The right shoulder was shallow since the selling pressure had been eased and bulls did not wait for a further correction before buying back into the market. Finally, on July 27, the bulls were able to push the price over the neckline, completing the (IHS) chart pattern.
The bears attempted to pin the bulls, and as a result, the price was dragged back to the neckline. Despite the fact that the price fell just below the neckline, traders did not allow the pair to fall below $10,000 for long. This reflected a shift in the public’s mood. As purchasers drove the price beyond $12,500, the positive trend accelerated even further.
Calculating the pattern target of a IHS setup
Get the depth from the neckline to the lowest point, forming the head, to calculate the minimal target objective of the (IHS) pattern. The neckline in the example above is around $10,450, and the depth is $6,667.87 after removing the lowest point of $3,782.13.
This amount is then added to the breakout level, which is roughly $10,550 in the case above. $17,217.87 is the target goal. When a downward trend turns upward, the intended objective may be missed or exceeded. As a result, traders should utilise the objective as a guide rather than exiting positions simply because the level has been hit.
At every breakout, no pattern succeeds, thus traders should wait for the setup to complete before entering trades. The pattern structure can form but the breakout does not always occur. Traders who trade before the pattern is completed are caught in a trap.
For instance, Chainlink’s LINK reached a high of $4.58 on June 29, 2019, and the stock began to decline. The buyers attempted to halt the drop in the $2.20 to $2.00 range by purchasing more stock. As may be seen in the chart above, this resulted in an (IHS) pattern with a head and two shoulders.
Despite the fact that the price touched the neckline on August 19, 2019, purchasers were unable to push the price higher. As a result, the pattern did not finish and the buy signal did not activate.
After turning down from the neckline, the LINK/USDT pair broke below the head of the setup at $1.96, rendering the pattern ineffective. Traders who had purchased in anticipation of a trend reversal were caught in the crossfire.
It is recommended that traders hold off on entering any long positions until the pattern has been completed, which occurs once the price has broken and closed above the neckline. Comparatively to a breakout of the neckline that occurs on low volumes, a breakout of the neckline that occurs on high volumes is more likely to result in the initiation of a fresh uptrend.
The (IHS) pattern may prove to be a beneficial tool for traders who want to get in on the ground floor of a new upsurge while it is just getting started. There are a few crucial factors to keep in mind when using this configuration.
When a trend reverses, it is common for it to continue for a long period of time. In order to avoid being rushed out of positions just because the pattern target has been reached, traders should take their time.
At other occasions, the pattern is completed but the direction of the price is rapidly reversed, resulting in a price drop. Before committing to a position, traders should pay special attention to the other indications and price action on the chart.
Unless otherwise stated, the thoughts and opinions expressed here are exclusively those of the author and do not necessarily reflect the views of Cointelegraph.com or its subsidiaries. Risk exists in every investment and trading decision; therefore, before making a decision, you should conduct your own study.