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A head and shoulders bottom is more commonly known as an inverse head and shoulders, and is a mirror image, for the most part, of the topping head and shoulders pattern. Look at the graph below. As the downtrend begins to change, you see 3 distinct bottoms. The middle bottom, or head, is slightly lower than either of the shoulders, and the neckline is slanting downward as is usual in this case. Just as with the topping pattern, there must be a decisive close through the neckline for the pattern to be complete. A pullback after the breakout could penetrate the neckline slightly, but the pattern will remain in an uptrend.

Volume is much more critical in identifying and completing a head and shoulders bottom. Generally, this holds true for all bottom patterns. It's a known fact that markets have a tendency to "fall of their own weight". However, at bottoms, the markets must have a significant increase in buying pressure, seen in greater volume, if it is to launch a new bull market.

The Swing, Options, or Day Trader looking at this from a technical analysis perspective knows that even though the market may fall from inertia, it doesn't go up that way. Lack of demand will push the market down, but prices will not rise unless demand exceeds supply and buyers are more aggressive than sellers.

The volume in the first half of the pattern at the bottom is like the top in that volume at the head is slightly lighter than at the left shoulder. The rally from the head should begin to show an increase in trading activity and the level of volume will often exceed the level registered on the rally of the left shoulder. The dip to the right shoulder will be on very light volume. The critical point here is when the rally breaks through the neckline. If the breakout is for real, it will be accompanied at this point by a sharp burst of trading volume.

It's here where the bottom differs the most from the top because heavy volume is absolutely essential in completing the basing pattern. The retun move is more common on the bottoms and should occur on light volume followed by the uptrend continuing on heavier volume. The measuring technique is the same for both tops and bottoms.

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Happy Trading,

Keith Greff
DaytradeTeam.com

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