Volume Driven Reversal
Evaluating the activity of stock prices over large periods of time, and interpreting the patterns that you find there as a way of informing your predictions about how a stock may act in the future is a practice known as technical analysis. When you see a small dip in price, followed by a large dip in price and then another small dip, almost equal with the first one, you’re looking at the head and shoulders reversal pattern. .
Also sometimes known as an inverse head and shoulders, this pattern is known to share many of its recognizable characteristics with its reversal cousin, the head and shoulders top, but instead of a significant uptrend, it relies even more on accompanying volume patterns in order to be confirmed..
In contrast to the head and shoulders top, the head and shoulders bottom is only possible after a confirmed downtrend, and when completed, investors can usually be assured that the downtrend will change into a more positive sloping trend. You can spot this pattern by looking for three troughs forming one after another, where the center trough, which is also referred to as the head, is the lowest point, and the two outer troughs, or the shoulders, are higher. Under ideal conditions, the two shoulder points will be equivalent in both width and height. The neckline of this pattern is formed by reaction highs that form in the middle of the pattern can be connected to verify resistance. .
The two most important aspects to correctly identifying this trend are the neckline resistance and volume patterns. When the neckline resistance breakout is seen at the same time as an increasing of volume, investors usually interpret this to mean that there will be an increase in demand at higher prices.