Most of us know Head and Shoulder as reversal patterns. A Head and Shoulder top is a bearish reversal pattern, while an inverse Head and Shoulder is a bullish reversal pattern. To learn more about these varieties, click this School of Stocks link here.
However, did you know that a Head and Shoulder can on rare occasions appear in the form of a continuation pattern as well? Well, you heard it right! Sometimes, you might notice a bearish Head and Shoulder pattern appearing during a downtrend and an inverse Head and Shoulder pattern appearing during an uptrend. In such cases, the break of the neckline indicates at continuation of the prior trend.
A month ago, i had posted the chart of the Nifty Commodity and Nifty Metal index, each of which were on verge of breaking above the neckline of an inverse Head and Shoulder pattern (Click here to see that post). What was special about these inverse Head and Shoulder patterns was that they appeared after a strong rally in price rather than after a strong decline. Hence, it was of the continuation variety type rather than the traditional reversal variety type. Post the breakout, both the indices have advanced remarkably.
Here is how continuation Head and Shoulder patterns look like:
When you spot these patterns, don't ignore them. If other technical parameters and tools also support the validity of these patterns, they can offer good trading opportunities with a well defined risk.