The head and shoulders bottom, or the inverse head and shoulders as it is sometimes called, is pretty much a mirror image of the top­ping pattern. As Figure 5.2a shows, there are three distinct bot‑toms with the head (middle trough) a bit lower than either of the two shoulders. A decisive close through the neckline is also nec­essary to complete the pattern, and the measuring technique is the same. One slight difference at the bottom is the greater ten­dency for the return move back to the neckline to occur after the bullish breakout. (See Figure 5.2b.)The most important difference between the top and bot­tom patterns is the volume sequence. Volume plays a much more critical role in the identification and completion of a head and shoulders bottom. This point is generally true of all bottom pat­terns. It was stated earlier that markets have a tendency to "fall of their own weight." At bottoms, however, markets require a signif­icant increase in buying pressure, reflected in greater volume, to launch a new bull market.A more technical way of looking at this difference is that a market can fall just from inertia. Lack of demand or buying interest on the part of traders is often enough to push a market lower; but a market does not go up on inertia. Prices only rise when demand exceeds supply and buyers are more aggressive than sellers.
The volume pattern at the bottom is very similar to that at the top for the first half of the pattern. That is, the volume at the head is a bit lighter than that at the left shoulder. The rally from the head, however, should begin to show not only an increase in trading activity, but the level of volume often exceeds that registered on the rally from the left shoulder. The dip to the right shoulder should be on very light volume. The critical point occurs at the rally through the neckline. This signal must be accompanied by a sharp burst of trading volume if the breakout is for real.
This point is where the bottom differs the most from the top. At the bottom, heavy volume is an absolutely essential ingredient in the completion of the basing pattern. The return move is more common at bottoms than at tops and should occur on light volume. Following that, the new uptrend should resume on heavier volume. The measuring technique is the same as at the top.
The Slope of the Neckline
The neckline at the top usually slopes slightly upward. Sometimes, however, it is horizontal. In either case, it doesn't make too much of a difference. Once in a while, however, a top neckline slopes downward. This slope is a sign of market weakness and is usually accompanied by a weak right shoulder. However, this is a mixed blessing. The analyst waiting for the breaking of the neckline to initiate a short position has to wait a bit longer, because the signal from the down sloping neckline occurs much later and only after much of the move has already taken place. For basing patterns, most necklines have a slight downward tilt. A ris­ing neckline is a sign of greater market strength, but with the same drawback of giving a later signal.