Series 7 Exam Question 108: Answer and Explanation

Question: 108

An inverted head and shoulder pattern indicates which of the following?

• A. Reversal of a bullish trend
• B. Reversal of a bearish trend
• C. The security is consolidating
• D. The security has broken past the resistance level

Correct Answer: B

Explanation:

B. A head and shoulder pattern looks how you would expect it: The head is the high point of the trend, and the two shoulders are a little lower. An inverted pattern is the same idea but only upside down. This means that the head is the lowest part of the trendline and the shoulders are the next lowest. Knowing that, an inverted head and shoulders pattern is a reversal of a bearish trend: Once it hits the head, it is showing a reversal of the downward trend, and now the security is starting to increase in value.