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Ascending Continuation Triangle Chart Pattern

Implication –An Ascending Continuation Triangle is considered a bullish signal. It indicates a possible continuation of the current uptrend.

Description- An Ascending Continuation Triangle shows two converging trendlines. The lower trendline is rising and the upper trendline is horizontal.

  • This pattern occurs because the lows are moving increasingly higher but the highs are maintaining a constant price level.
  • The pattern will have two highs and two lows, all touching the trendlines.
  • This pattern is confirmed when the price breaks out of the triangle formation to close above the upper trendline.

Volume is an important factor to consider. Typically, volume follows a reliable pattern: volume should diminish as the price swings back and forth between an increasingly narrow range of highs and lows. However, when breakout occurs, there should be a noticeable increase in volume. If this volume picture is not clear, investors should be cautious about decisions based on this Triangle.

Important Characteristics

Following are important characteristics about this pattern.

Occurrence of a Breakout
Technical analysts pay close attention to how long the Triangle takes to develop to its apex. The general rule is that prices should break out – clearly penetrate one of the trendlines – somewhere between three-quarters and two-thirds of the horizontal width of the formation. The break out, in other words, should occur well before the pattern reaches the apex of the Triangle. The closer the breakout occurs to the apex the less reliable the formation.

Duration of the Triangle
The Triangle is a relatively short-term pattern. It may take between one and three months to form.

Shape of Triangle
The horizontal top trendline need not be completely horizontal but it should be close to horizontal.

Volume
Investors should see volume decreasing as the pattern progresses toward the apex of the Triangle. At breakout, however, there should be a noticeable increase in volume.

Trading Considerations

Duration of the Pattern
Consider the duration of the pattern and its relationship to your trading time horizons. The duration of the pattern is considered to be an indicator of the duration of the influence of this pattern. The longer the pattern the longer it will take for the price to move to the target price. The shorter the pattern the sooner the price move. If you are considering a short-term trading opportunity, look for a pattern with a short duration. If you are considering a longer-term trading opportunity, look for a pattern with a longer duration.

Target Price
The target price provides an important indication about the potential price move that this pattern indicates. Consider whether the target price for this pattern is sufficient to provide adequate returns after your costs (such as commissions) have been taken into account. A good rule of thumb is that the target price must indicate a potential return of greater than 5% before a pattern should be considered useful. However you must consider the current price and the volume of shares you intend to trade. Also, check that the target price has not already been achieved.

Inbound Trend
The inbound trend is an important characteristic of the pattern. A shallow inbound trend may indicate a period of consolidation before the price move indicated by the pattern begins. Look for an inbound trend that is longer than the duration of the pattern. A good rule of thumb is that the inbound trend should be at least two times the duration of the pattern.

Criteria that Supports

Support and Resistance
Look for a region of support at the lowest low and a line of resistance at the top of the Triangle.

Moving Average
Compare prices to the 200 day Moving Average. When prices are close to or touch the 200 day Moving Average this signal is considered stronger.

Volume
A strong volume spike on the day of the pattern confirmation is a strong indicator in support of the potential for this pattern. The volume spike should be significantly above the average of the volume for the duration of the pattern. In addition, the volume during the duration of the pattern should be declining on average.

Criteria that Refutes

No Volume Spike on Breakout
The lack of a volume spike on the day of the pattern confirmation is an indication that this pattern may not be reliable. In addition, if the volume has remained constant, or was increasing, over the duration of the pattern, then this pattern should be considered less reliable.

Short Inbound Trend
An inbound trend that is significantly shorter than the pattern duration is an indication that this pattern should be considered less reliable.

Underlying Behavior

This pattern with its increasingly higher lows and constant highs indicates that buyers are more aggressive than sellers. The pattern forms because of a supply of shares is available at a fixed price. When the supply depletes, the shares quickly breakout from the top trendline and move higher.

Bottom Triangle Wedge Chart Pattern

Description

A Bottom Triangle/Wedge consists of a group of patterns which have the same general shape as Symmetrical Triangles, Wedges, Ascending Triangles and Descending Triangles. The difference is that the formations grouped together as this type are reversal and not continuation patterns. These patterns have two converging trendlines. The pattern will display two highs touching the upper trendline and two lows touching the lower trendline.

This pattern is confirmed when the price breaks upward out of the Triangle/Wedge formation to close above the upper trendline.

Volume is an important factor to consider. Typically, volume follows a reliable pattern: volume should diminish as the price swings back and forth between an increasingly narrow range of highs and lows. However, when the breakout occurs, there should be a noticeable increase in volume. If this volume picture is not clear, investors should be cautious about decisions based on this Triangle/Wedge.

 

Important Characteristics

Following are important characteristics for this pattern.

Occurrence of a Breakout

Technical analysts pay close attention to how long the pattern takes to develop to its apex. The general rule is that prices should break out – clearly penetrate the upper trendline – somewhere between three-quarters and two-thirds of the horizontal width of the formation. The break out, in other words, should occur well before the pattern reaches the apex of the Triangle/Wedge. The closer the breakout occurs to the apex the less reliable the formation.

Duration of the Triangle/Wedge

This pattern is a relatively short-term. While long-term Triangles/Wedges do form, the most reliable patterns take between one and three months to form.

 

Volume

Investors should see volume decreasing as the pattern progresses toward the apex of the Triangle/Wedge. At breakout, however, there should be a noticeable increase in volume.

Trading Considerations

Duration of the Pattern

Consider the duration of the pattern and its relationship to your trading time horizons. The duration of the pattern is considered to be an indicator of the duration of the influence of this pattern. The longer the pattern the longer it will take for the price to reach its target. The shorter the pattern the sooner the price move. If you are considering a short-term trading opportunity, look for a pattern with a short duration. If you are considering a longer-term trading opportunity, look for a pattern with a longer duration.

Target Price

The target price provides an important indication about the potential price move that this pattern indicates. Consider whether the target price for this pattern is sufficient to provide adequate returns after your costs (such as commissions) have been taken into account. A good rule of thumb is that the target price must indicate a potential return of greater than 5% before a pattern should be considered useful. However you must consider the current price and the volume of shares you intend to trade. Also, check that the target price has not already been achieved.

Inbound Trend

The inbound trend is an important characteristic of the pattern. A shallow inbound trend may indicate a period of consolidation before the price move indicated by the pattern begins. Look for an inbound trend that is longer than the duration of the pattern. A good rule of thumb is that the inbound trend should be at least two times the duration of the pattern.

Criteria that Supports

Support and Resistance

Look for a region of support or resistance around the target price. A region of price consolidation or a strong Support and Resistance Line at or around the target price is a strong indicator that the price will move to that point.

Moving Average

Watch for the 200 day moving average to flatten. When prices cross above the 200 day moving average (usually about two-thirds to three-quarters of the way through the pattern), the pattern is considered more reliable.

Volume

A strong volume spike on the day of the pattern confirmation is a strong indicator in support of the potential for this pattern. The volume spike should be significantly above the average of the volume for the duration of the pattern. In addition, the volume during the duration of the pattern should be declining on average.

Criteria that Refutes

No Volume Spike on Breakout

The lack of a volume spike on the day of the pattern confirmation is an indication that this pattern may not be reliable. In addition, if the volume has remained constant, or was increasing, over the duration of the pattern, then this pattern should be considered less reliable.

Short Inbound Trend

An inbound trend that is significantly shorter than the pattern duration is an indication that this pattern should be considered less reliable.

Underlying Behavior

This pattern is a result of converging trendlines of support and resistance which give this pattern its distinctive shape. This occurs because the trading action gets tighter and tighter until the market breaks out with great force. Buyers and sellers find themselves in a period where they are not sure where the market is headed. Their uncertainty is marked by their actions of buying and selling sooner, making the range of the price movements increasingly tight. As the range between the peaks and troughs marking the progression of price narrows, the trendlines meet at the “apex,”.

The narrowing of the trading action and the decreasing volume of trade reflect the indecision in the market. Finally consensus or decision in the market is reached and this is reflected as the price breaks out of the Triangle/Wedge. A spike in volume on this breakout date reflects stronger consensus that the financial instrument should move in that direction.

 

 

 

Continuation Diamond (Bullish) Stock Chart Pattern

 

Implication

A Continuation Diamond (Bullish) is considered a bullish signal, indicating that the current uptrend may continue.

Description

Diamond patterns usually form over several months in very active markets. Volume will remain high during the formation of this pattern. The Continuation Diamond (Bullish) pattern forms because prices create higher highs and lower lows in a broadening pattern. Then the trading range gradually narrows after the highs peak and the lows start trending upward. The Technical Analysis occurs when prices break upward out of the diamond formation to continue the prior uptrend

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Trading Considerations

Duration of Pattern

Consider the duration of the pattern and its relationship to your trading time horizons. The duration of the pattern is considered to be an indicator of the duration of the influence of this pattern. The longer the pattern the longer it will take for the price to move to its target. The shorter the pattern the sooner the price move. If you are considering a short-term trading opportunity, look for a pattern with a short duration. If you are considering a longer-term trading opportunity, look for a pattern with a longer duration.

Target Price

The target price provides an important indication about the potential price move that this pattern indicates. Consider whether the target price for this pattern is sufficient to provide adequate returns after your costs (such as commissions) have been taken into account. A good rule of thumb is that the target price must indicate a potential return of greater than 5% before a pattern should be considered useful. However you must consider the current price and the volume of shares you intend to trade. Also, check that the target price has not already been achieved.

Inbound Trend

The inbound trend is an important characteristic of the pattern. A shallow inbound trend may indicate a period of consolidation before the price move indicated by the pattern begins. Look for an inbound trend that is longer than the duration of the pattern. A good rule of thumb is that the inbound trend should be at least 2 times the duration of the pattern.

Criteria that Supports

Support and Resistance

Support can be found at the turning point of the lows and resistance at the top peak of the Diamond.

Criteria that Refutes

No Volume

A lack of a volume throughout the pattern is an indication that this pattern may not be reliable.

Short Inbound Trend An inbound trend that is significantly shorter than the pattern duration is an indication that this pattern should be considered less reliable.

Continuation Wedge (Bullish)

 

Implication

A Continuation Wedge (Bullish) is considered a bullish signal. It indicates a possible continuation of the current uptrend.

Description

A Continuation Wedge (Bullish) consists of two converging trend lines. The trend lines are slanted downward. Unlike the Triangles where the apex is pointed to the right, the apex of this pattern is slanted downwards at an angle. This is because prices edge steadily lower in a converging pattern i.e. there are lower highs and lower lows. A bullish signal occurs when prices break above the upper trendline.

Over the weeks or months that this pattern forms the trend appears downward but the long-term range is still upward. Volume should diminish as the pattern forms.

Trading Considerations

Pattern Duration
Consider the duration of the pattern and its relationship to your trading time horizons. The duration of the pattern is considered to be an indicator of the duration of the influence of this pattern. The longer the pattern the longer it will take for the price to move to the Target. The shorter the pattern the sooner the price move. If you are considering a short-term trading opportunity, look for a pattern with a short duration. If you are considering a longer-term trading opportunity, look for a pattern with a longer duration.
Target Price
The target price provides an important indication about the potential price move that this pattern indicates. Consider whether the target price for this pattern is sufficient to provide adequate returns after your costs (such as commissions) have been taken into account. A good rule of thumb is that the target price must indicate a potential return of greater than 5% before a pattern should be considered useful. However you must consider the current price and the volume of shares you intend to trade. Also, check that the target price has not already been achieved.

Criteria that Supports

Volume
Volume should diminish as the pattern forms.

Criteria that Refutes

Moving Average
The penetration of the 200-day Moving Average by the price is a false bear signal.
Rising or Stable Volume
Volume should diminish as the pattern forms. If volume remains the same or increases this signal is less reliable.

Underlying Behavior

In this pattern prices edge steadily lower in a converging pattern i.e. there are lower highs and lower lows indicating that bears are winning over bulls. However, at the breakout point the bulls emerge the victors and the price rises.
Although it appears things are changing and the “BULL” is lurking, this pattern is typically “corrective” in nature to a larger trend or pattern. These wedges can typically retrace 50-65% of the FALL before it resumes the primary trend.

Statistics

Percent of successful formations – 81% Average rise of successful formations – 46% Likely rise – 20% Failure rate – 37% Average time to throwback completion – 11 days

 

 

 

Cup with Handle Bullish Chart Pattern

Implication

A Cup with Handle is considered to be a bullish signal.

Description

Cups with Handles are similar in appearance to Rounded Bottoms. Like rounded bottoms, the pattern includes an elongated U-shape. However, the pattern also includes a short period of consolidation of 1-2 weeks in duration, which tends to be downtrending. The pattern is similar in appearance to a coffee cup with a right-side handle, and indicates the potential for an uptrend.

 

Important Characteristics

Following are important characteristic to look for in a Cup and Handle.

Shape

The cup always precedes the handle. As the cup develops, the price pattern follows a gradual bowl shape. There should be an obvious bottom to the bowl; a v-shaped turn is not a good indicator.

The depth of the cup indicates the potential for a handle and subsequent breakout to develop. The cup should be fairly shallow.

The handle tends to be down sloping, and indicates a period of consolidation. Consolidation occurs when the price seems to bounce between an upper and lower price limit. You can track the down sloping angle of the handle by drawing trendlines across the upper and lower price limits. If the price ascends outside of the trendlines, then it has the potential for breakout. If the price ascends beyond the upper, right side of the cup, then the pattern is confirmed, particularly if it is accompanied with a sharp increase in volume.

Volume

Volume tends to parallel the price pattern. Consequently, during the cup formation, as price descends, volume tends to decrease. Following a period of relative inactivity (at the bottom of the cup), the price pattern starts an upward turn and volume tends to increase.

During the handle formation, the volume decreases. However, you will notice an increase in volume when the price breaks out beyond the right side of the cup.

Duration of the Cup and Handle

Rounded Bottoms are long-term patterns. Martin J. Pring identifies that the pattern can occur over a period of about 3 weeks, but can also be observed over several years.

Trading Considerations

Duration of the Pattern

Like Rounded Bottoms, the Cup with Handle is a long-term pattern. According to O’Neil, the cup duration is between 7 to 65 weeks. According to Gregory Khun, the cup “is usually three to six months in duration but can be as long as 12 months during bear markets or as short as seven weeks during bull markets.” The handle usually develops in 1-2 weeks.

Target Price

Understandably, investors like to buy at the lowest possible price. Ideally, investors would buy at the bottom of the cup formation. However, by the time the handle formation begins to develop, investors must gauge their level of risk. There is no surefire way to predict when the lowest point will occur, and there is a possibility that the pattern will fail, and breakout in a downtrend.

Some technical analysts believe that the best time to buy is after the handle begins to ascend. According to Rick Martinelli and Barry Hyman, O’Neil “recommends buying stocks only as they break out of the cup-with-handle to new highs”. Khun suggests a more aggressive method of buying stocks. He suggests that “experienced traders can buy in increments in anticipation of a breakout, but it’s tricky.”

 

 

 

The handle will often slope downwards initially, however, watch for the price to breakout beyond the price at the right side of the cup. The depth of the cup from the right side is an indicator for the potential price increase. However, Bulkowski notes, “Many cups fail after rising only 10% to 15%. Be sure to use stop-loss orders to limit losses or to maximize gains”.

Criteria that Supports

Volume

Volume tends to parallel the price formation. During the handle formation, watch for the price and volume to increase. An increase in volume is an indication that the pattern has potential to continue the uptrend, and ascend beyond the right side of the cup.

Criteria that Refutes

V-shape

There are v-shaped patterns that yield successful returns, however, during the cup formation, watch for a rounded shape because the rounded shape provides a more reliable and predictable formation.

Down sloping handles

The handle will tend to be down sloping, however the following criteria indicate a potential failure:

  • the handle should not drop below the top half of the cup formation
  • the price should not drop below the 200 day Moving Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diamond Bottom Chart Pattern

 

 

Implication

A Diamond Bottom is considered a bullish signal, indicating a possible reversal of the current downtrend to a new uptrend.

Description

Diamond patterns usually form over several months in very active markets. Volume remains high during the formation of this pattern.

The Diamond Bottom pattern occurs because prices create higher highs and lower lows in a broadening pattern. Then the trading range gradually narrows after the highs peak and the lows start trending upward. The Technical Analysis occurs when prices break upward out of the diamond formation.

                                  

Trading Considerations

Duration of Pattern

Consider the duration of the pattern and its relationship to your trading time horizons. The duration of the pattern is considered to be an indicator of the duration of the influence of this pattern. The longer the pattern the longer it will take for the price to move to its target. The shorter the pattern the sooner the price move. If you are considering a short-term trading opportunity, look for a pattern with a short duration. If you are considering a longer-term trading opportunity, look for a pattern with a longer duration.

Target Price

The target price provides an important indication about the potential price move that this pattern indicates. Consider whether the target price for this pattern is sufficient to provide adequate returns after your costs (such as commissions) have been taken into account. A good rule of thumb is that the target price must indicate a potential return of greater than 5% before a pattern should be considered useful. However you must consider the current price and the volume of shares you intend to trade. Also, check that the target price has not already been achieved.

Inbound Trend

The inbound trend is an important characteristic of the pattern. A shallow inbound trend may indicate a period of consolidation before the price move indicated by the pattern begins. Look for an inbound trend that is longer than the duration of the pattern. A good rule of thumb is that the inbound trend should be at least 2 times the duration of the pattern.

Criteria that Supports

Support and Resistance

Support can be found at the turning point of the lows and resistance at the top peak of the Diamond.

Moving Average

Watch for the 200-day Moving Average to flatten out. Then watch for the 50-day Moving Average to cross above the 200-day Moving Average. This should signal the breakout.

Criteria that Refutes

No Volume

A lack of a volume throughout the pattern is an indication that this pattern may not be reliable.

Short Inbound Trend

An inbound trend that is significantly shorter than the pattern duration is an indication that this pattern should be considered less reliable.

 

 

 

 

 

 

 

 

 

 

Double Bottom Chart Pattern

Introduction

A double bottom occurs when prices form two distinct lows on a chart. A double bottom is only complete, however, when prices rise above the high end of the point that formed the second low.
The double bottom is a reversal pattern of a downward trend in a stock’s price. The double bottom marks a downtrend in the process of becoming an uptrend.
Double bottoms are often seen and are considered to be among the most common of the patterns. Because they seem to be so easy to identify, the double bottom should be approached with caution by the investor.
According to Schabacker, the double bottom is a “much misunderstood formation.” Many investors assume that, because the double bottom is such a common pattern, it is consistently reliable. This is not the case. Bulkowski estimates the double bottom has a failure rate of 64%, which he terms surprisingly high.If an investor waits for a valid breakout, however, the failure rate declines to 3%. The double bottom is a pattern, therefore, that requires close study for correct identification

What does a double bottom look like?

As seen below, a double bottom consists of two well-defined lows at approximately the same price level. Prices fall to a support level, rally and pull back up, then fall to the support level again before increasing.

 

 

The two lows should be distinct. According to Edwards and Magee, the second bottom can be rounded while the first should be distinct and sharp. The pattern is complete when prices rise above the highest high in the formation. The highest high is called the confirmation point.
Analysts vary in their specific definitions of a double bottom. According to some, after the first bottom is formed, a rally of at least 10% should follow. That increase is measured from high to low. According to Edwards and Magee, there should be at least a 15% rally following the first bottom. This should be followed by a second bottom. The second bottom returning back to the previous low (plus or minus 3%) should be on lower volume than the first. Other analysts maintain that the rise registered between the two bottoms should be at least 20% and the lows should be spaced at least a month apart.
There are a few points of agreement, however. Investors should ensure that the pattern is in fact comprised of two distinct bottoms and that they should appear at or near the same price level. Bottoms should have a significant amount of time between them – ranging from a few weeks to a year depending on whether an investor is viewing a weekly chart or a daily chart. Investors should not confuse a consolidation pattern with a double bottom. Finally, it is crucial to the completion of the reversal pattern that prices close above the confirmation point.

Why is this pattern important?

According to Murphy, the double bottom is one of the most frequently seen and most easily recognized. However, analysts agree that this can be a difficult pattern to correctly identify. Investors must pay close attention to the volume during the formation of the pattern, the amount of increase between the two lows, and the time the pattern takes to develop on the chart.
Murphy explains that bottoming patterns may have smaller price ranges than topping patterns and often take longer to build. “For this reason, it is usually easier and less costly to identify and trade bottoms than to catch market tops.”
It is quite common after prices reach a new low for a rebound in prices to occur. A retest of the low then usually follows. According to Bulkowski, a retest occurs when prices return to the low and test to see if the stock can support itself at that price level. “If it cannot, prices continue moving downward. Otherwise, the low usually becomes the end of the decline and rising prices result.”

Is volume important in a double bottom?

Investors should pay close attention to volume when analyzing a double bottom.
Generally, volume in a double bottom is usually higher on the left bottom than the right. Volume tends to be downward as the pattern forms. Volume does, however, pick up as the pattern hits its lows. Volume increases again when the pattern completes, breaking through the confirmation point.
Monitoring volume is a key aspect of determining whether or not a double bottom is valid.

Schabacker insists that the volume rule must be applied quite strictly in the case of a double bottom.Elaine Yager, Director of Technical Analysis at Investec Ernst and Company in New York and a member of Recognia’s Board of Advisors, strongly agrees with this point. The first low must be made with noticeably high volume. The second low must also experience high volume but it need not achieve the level of the first low. Bulkowski explains that volume tends to rise substantially at the time of breakout.

 

What are the details that I should pay attention to in the double bottom?

1. Downtrend Preceding Double Bottom
As mentioned previously, the double bottom is a reversal formation. It begins with prices in a downtrend. Bulkowski cautions that on their way down, prices should not drift below the left low of the pattern.
2. Time between Bottoms
Analysts pay close attention to the “size” of the pattern – the duration of the interval between the two lows. Generally, the longer the time between the two lows, the more important the pattern as a good reversal. Schabacker warns investors off of a pattern where only a few days intervene between the two lows. Analysts suggest that investors should look for patterns where at least one month elapses between the bottoms. It is not unusual for a few months to pass between the dates of the two bottoms. Murphy mentions that these patterns can span several years.Yager notes, however, that tracking of bottoms that run for several years can become cumbersome and difficult. Bulkowski suggests that best gains come from formations where bottoms are approximately 3 months apart.

 

3. Increase from First Low
Some analysts argue the increase in price that occurs between the two bottoms should be consequential, amounting to approximately 20% of the price. Other analysts are not so definite or demanding concerning the price increase. For some, an increase of at least 10% is adequate. Yager strongly agrees with this point. The rise between the lows tends to look rounded but it can also be irregular in shape.
4. Volume
As mentioned previously, volume tends to be heaviest during the first low, lighter on the second. It is common to see volume pick up again at the time of breakout.
5. Decisive Breakout
According to Murphy, the technical odds usually favor the continuation of the present trend.This means that it is perfectly normal market action for prices on a downtrend to fall to a support level a couple of times, rise back up, and then resume that downtrend. It is a challenge for the analyst to determine whether the rise from the bottom is the indication of the development of a valid double bottom or simply a temporary setback in the progression of a continuing downtrend.Analysts, therefore, advise cautious investors to wait for the price to rise back up and break through the confirmation point before relying on the validity of the pattern. Many experts will maintain that an investor should wait for a decisive breakout, confirmed by high volume.
6. Pullback after Breakout
A pullback after the breakout is usual for a double bottom. Bulkowski estimates that in 68% of double bottom patterns, price will throwback to the breakout price.

 

How can I trade this pattern?

Begin by calculating the target price -of the minimum expected price move. The double bottom is measured in a way similar to that for the head and shoulders bottom.
Calculate the height of the pattern by subtracting the lowest low from the highest high in the formation. Then, add the height of the pattern to the highest high. In other words, an investor can expect the price to move upwards at least the distance from the breakout point plus the height of the pattern.
For example, assume the lowest low of the double bottom is 220 and the highest high is 290. The height of the pattern equals 70 (290 – 220 = 70). The minimum target price is 360 (290 + 70 = 360).
Murphy cautions the terms “double tops and bottoms” are greatly overused in the markets. Most of the patterns referred to as double bottoms are, in fact, something else. Because of this, Murphy advises investors to make their investment decisions only after prices have broken through the confirmation point, completing the reversal pattern.Watching the volume throughout the development of the pattern can help determine whether the pattern is a valid double bottom.
Yager notes that the key for this pattern is for the investor to have patience and wait for confirmation. Too often investors see double bottoms everywhere.
Edwards and Magee explain that patterns where the bottoms are close together in time are likely not valid double bottoms but are, in fact, a consolidation area.
Because so many double bottoms pullback after breaking through the confirmation point, it is often possible to wait for the pullback to place a trade and then watch prices decline for a second time. Bulkowski estimates that the average time for prices to return to the breakout price is 11 days. Throwbacks that occur 30 days after the breakout are not throwbacks at all, but simply normal price fluctuations.
Bulkowski offers advice for both short-term and long-term investors. Because only approximately 68% of double bottoms meet their price targets, he advises short-term investors to be ready to take profits as price nears the target. In other words, sell as prices get close to the target.Long-term investors, he suggests, can hold onto the stock for an extended upward move but should keep watch on the fundamentals to determine whether they are justified in continuing to hold the stock.

 

Are there variations in the pattern that I should know about?

1. Two Lows at Different Levels
Sometimes the two lows comprising a double bottom are not at exactly the same price level. This does not necessarily render the pattern invalid. Analysts advise that if the second low varies in price from the first low by more than 3% or 4%, the pattern may not be a double bottom.

Flag (Bullish) Stock Chart Pattern

Implication

A Flag (Bullish) is considered a bullish signal, indicating that the current uptrend may continue.

Description

A Flag (Bullish) follows a steep, or nearly vertical rise in price, and consists of two parallel trendlines that form a rectangular flag shape. The Flag can be horizontal (as though the wind is blowing it), however it often has a slight downtrend.

The vertical uptrend, that precedes a Flag, may occur because of buyers’ reactions to a favorable company earnings announcement, or a new product launch. The sharp price increase is sometimes referred to as the “flagpole” or “mast”.

The rectangular flag shape is the product of what technical analysts refer to as consolidation. Consolidation occurs when the price seems to bounce between an upper and lower price limit. This might occur, for example, in the days following a positive product announcement, when the excitement is starting to subside, and fewer buyers are willing to pay the high price that was commanded just a few days before. But, at the same time, sellers are unwilling to sell below a lower support limit.

A bullish signal occurs when the price rebounds beyond the upper trendline of the Flag formation, and continues the original upward price movement. This is considered a pattern confirmation.

When speaking about Flags, technical analysts may use jargon and refer to the flag as “flying at half-mast”. Visually, this reference is nothing like a flag at half-mast, such as on a day of national mourning. Instead, this term refers to the location of the flag – at the mid-point of what would otherwise be a continuous uptrend.

Important Characteristics

Following are important characteristics for this pattern.

 

Trendlines

Flags are very similar to Pennants. However, with a Flag, the price trendlines tend to run parallel, whereas with a Pennant, the price trendlines tend to converge.

Volume

As the Flag develops, the volume tends to decrease. Following a positive product announcement, the price may have reached an unexpected high, and fewer buyers will be willing to buy. Interest in the stock may resume, however, as prices drop, and sellers begin to lower their price. The increased activity explains why you will often notice a sharp spike in volume at the end of a Flag.

Duration of the Pattern

Martin Pring notes in his book, Technical Analysis Explained that “Flags can form in a period as short as 5 days or as longs as 3 to 5 weeks.” John J. Murphy identifies that Flags “often last no longer than one or two weeks.”

 

Trading Considerations

Possibility of Price Reversal

In some rare cases, the price will break against the original price movement, and create a reversal trend. The pattern reversal may be signaled during the Flag formation by a sharp increase in volume, as opposed to the more typical decrease.

Duration of the Pattern

The duration of the pattern depends on the extent of the price fluctuations (consolidation). The greater the fluctuations, the longer a pattern will take to develop.

Target Price

It is commonly held that the length of the flagpole indicates the potential price increase. When the Flag completes, the price typically jumps to replicate the height of the original flagpole, while continuing in the direction of the inbound trend.

Criteria that Supports

Volume

Volume should diminish noticeably as the pattern forms.

A strong volume spike on the day of the pattern confirmation is a strong indicator in support of the potential for this pattern. The volume spike should be significantly above the average of the volume for the duration of the pattern. In addition, the volume over the course of the pattern should be declining on average.

 

Criteria that Refutes

Duration of the Pattern

According to Martin Pring, a pattern that exceeds “4 weeks to develop should … be treated with caution”. After 4 weeks, interest in the stock is likely to decrease to point that it is unlikely to continue in a strong uptrend.

No Volume Spike on Breakout

The lack of a volume spike on the day of the pattern confirmation is an indication that this pattern may not be reliable. In addition, if the volume has remained constant, or was increasing, over the duration of the pattern, then this pattern should be considered less reliable and may actually reverse.

Long Inbound Trend

Shabacker writes that, “When a mast is long … and it’s Flag relatively small, we should naturally expect the movement to be pretty well exhausted when its indicated objective is reached.” He suggests that when you observe this formation, and a price continuation occurs, it is best to use the flagpole as a “yard-stick” to indicate the level at which to “take profits, step aside, and watch for further chart developments.”

Underlying Behavior

This pattern is effectively a pause in an uptrend. The price has gotten ahead of itself with a steep rise; therefore market activity takes a break before continuing the uptrend. This pause is reflected in the decreasing trading volume. Similarly, a spike in volume marks the resumption of the uptrend.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Head and Shoulders Bottom Chart Pattern

Implication

A Head and Shoulders Bottom is considered a bullish signal. It indicates a possible reversal of the current downtrend into a new uptrend.

Description

The Head and Shoulders bottom is a popular pattern with investors. This pattern marks a reversal of a downward trend in a financial instrument’s price.

Volume is absolutely crucial to a Head and Shoulders Bottom. An investor will be looking for increasing volumes at the point of breakout. This increased volume definitively marks the end of the pattern and the reversal of a downward trend in the price of a stock.

A perfect example of the Head and Shoulders Bottom has three sharp low points created by three successive reactions in the price of the financial instrument. It is essential that this pattern form following a major downtrend in the financial instrument’s price.

The first point – the left shoulder – occurs as the price of the financial instrument in a falling market hits a new low and then rises in a minor recovery. The second point – the head happens when prices fall from the high of the left shoulder to an even lower level and then rise again. The third point – the right shoulder – occurs when prices fall again but don’t hit the low of the head. Prices then rise again once they have hit the low of the right shoulder. The lows of the shoulders are definitely higher than that of the head and, in a classic formation, are often roughly equal to one another.

The neckline is a key element of this pattern. The neckline is formed by drawing a line connecting the two high price points of the formation. The first high point occurs at the end of the left shoulder and beginning of the downtrend to the head. The second marks the end of the head and the beginning of the downturn to the right shoulder. The neckline usually points down in a Head and Shoulders Bottom, but on rare occasions can slope up.

The pattern is complete when the resistance marked by the neckline is “broken”. This occurs when the price of the stock, rising from the low point of the right shoulder moves up through the neckline. Many technical analysts only consider the neckline “broken” if the stock closes above the neckline.

The volume sequence should progress beginning with relatively heavy volume as prices descend to form the low point of the left shoulder. Once again, volume spikes as the stock hits a new low to form the point of the head. It is possible that volume at the head may be slightly lower than at the left shoulder. When the right shoulder is forming, however, volume should be markedly lighter as the price of the stock once again moves lower.

It is most important to watch volume at the point where the neckline is broken. For a true reversal, experts agree that heavy volume is essential.

 

Variations of the Head and Shoulders Bottom

There are a few notable variations for this pattern.

Multiple Head and Shoulders Patterns

Many valid Head and Shoulders patterns are not as well defined as the classical head with a shoulder on either side. It is not uncommon to see more than two shoulders and more than one head. A common version of a multiple Head and Shoulders pattern includes two left shoulders of more or less equal size, one head, and then two right shoulders that mimic the size and shape of the left shoulders.

Flat Shoulders

The classic Head and Shoulders pattern is made up of three sharply pointed components – the head and two shoulders. This is not always the case. Sometimes, the shoulders can lack sharp low points and instead be quite rounded. This does not affect the validity of the pattern.

Important Characteristics

Following are important characteristics for this pattern.

Symmetry

In a classic Head and Shoulders Bottom, the left and right shoulders hit their relative low points at approximately the same price and level. In addition, the shoulders are usually about the same distance from the head. Experts like to see symmetry but variations are not lethal to the validity of the pattern.

Volume

It is critical to watch the volume sequence as this pattern develops. Volume will usually be highest on the left shoulder and lowest on the right. Investors, looking to ensure that volume increases in the direction of the trend, should ensure that a “burst” in volume occurs at the time the neckline is broken.

Duration of Pattern

It is not unusual for a Head and Shoulders bottom to take several months to develop. Volume activity in stocks is characteristically less after a period of declining prices than after a bull market. Because of this lower volume, bottoms take longer to form and tend to be smaller than tops

Need for a Downtrend

This is a reversal pattern which marks the transition from a downtrend to an uptrend.

Slope of the Neckline

In a well-formed pattern, the slope will not be too steep, but don’t automatically discount a formation with a steep neckline. Some experts believe an upward sloping neckline is more bullish than a downward sloping one. Others say slope has little to do with the stock’s degree of bullishness.

Trading Considerations

Duration of the Pattern

Consider the duration of the pattern and its relationship to your trading time horizons. The duration of the pattern is considered to be an indicator of the duration of the influence of this pattern. The longer the pattern the longer it will take for the price to reach the Target Price. The shorter the pattern the sooner the price move. If you are considering a short-term trading opportunity, look for a pattern with a short duration. If you are considering a longer-term trading opportunity, look for a pattern with a longer duration. The duration of the pattern is sometimes called the “width” or “length” of the pattern.

Target Price

The target price provides an important indication about the potential price move that this pattern indicates. Consider whether the target price for this pattern is sufficient to provide adequate returns after your costs (such as commissions) have been taken into account. A good rule of thumb is that the target price must indicate a potential return of greater than 5% before a pattern should be considered useful. However you must consider the current price and the volume of shares you intend to trade. Also, check that the target price has not already been achieved.

Inbound Trend

The inbound trend is an important characteristic of the pattern. A shallow inbound trend may indicate a period of consolidation before the price move indicated by the pattern begins. Look for an inbound trend that is longer than the duration of the pattern. A good rule of thumb is that the inbound trend should be at least two times the duration of the pattern.

 

Criteria that Supports

Support and Resistance

Look for a region of support or resistance around the target price. A region of price consolidation or a strong Support and Resistance Line at or around the target price is a strong indicator that the price will move to that point.

Location of Moving Average

The Head and Shoulders Bottom should be be below the Moving Average. Compare the location of the pattern to a Moving Average of appropriate length. For short duration patterns use a 50 day Moving Average, for longer patterns use a 200 day Moving Average.

Moving Average Trend

The Moving Average should change direction within the duration of the pattern and should head in the direction indicated by the pattern. For short duration patterns use a 50 day Moving Average, for longer patterns use a 200 day Moving Average.

Volume

Volume will usually be highest on the left shoulder and lowest on the right.

A strong volume spike on the day of the pattern confirmation is a strong indicator in support of the potential for this pattern. The volume spike should be significantly above the average of the volume for the duration of the pattern.

Other Patterns

Other reversal patterns (such as Bullish and Bearish Engulfing Lines and Islands) that occur at the peaks and valleys indicate strong resistance at those points. The presence of these patterns inside a Head and Shoulders is a strong indication in support of this pattern.

 

Criteria that Refutes

No Volume Spike on Confirmation

The lack of a volume spike on the day of the pattern confirmation is an indication that this pattern may not be reliable. In addition, if the volume has remained constant, or was increasing, over the duration of the pattern, then this pattern should be considered less reliable.

Location of Moving Average

If the Head and Shoulders Bottom is above the Moving Average then this pattern should be considered less reliable. Compare the location of the pattern to a Moving Average of appropriate length. For short duration patterns use a 50 day Moving Average, for longer patterns use a 200 day Moving Average.

Moving Average Trend

Look at the direction of the Moving Average Trend. For short duration patterns use a 50 day Moving Average, for longer patterns use a 200 day Moving Average. A Moving Average that is trending in the opposite direction to that indicated by the pattern is an indication that this pattern is less reliable.

Short Inbound Trend

An inbound trend that is significantly shorter than the pattern duration is an indication that this pattern should be considered less reliable.

 

 

 

 

 

 

 

 

Megaphone Bottom Chart Pattern

Implication

A Megaphone Bottom also known as a Broadening Bottom is considered a bullish signal, indicating that the current downtrend may reverse to form a new uptrend.

Description

This rare formation can be recognized by the successively higher highs and lower lows, which form after a downward move. Usually, two higher highs between three lower lows form the pattern, which is completed when prices break above the second higher high and do not fall below it.

The pattern is completed when, usually on the third upswing within the pattern, prices break above the prior high but fail to fall below this level again.

 

Bottoming Pattern

Bullish Pennant Chart Pattern

Implication

A Pennant (Bullish) is considered a bullish signal, indicating that the current uptrend may continue.

Description

A Pennant (Bullish) follows a steep, or nearly vertical rise in price, and consists of two converging trendlines that form a narrow, tapering flag shape. The Pennant shape generally appears as a horizontal shape, rather than one with a downtrend or uptrend.

Apart from its shape, the Pennant is similar in all respects to the Flag. The Pennant is also similar to the Symmetrical Triangle or Wedge continuation patterns however; the Pennant is typically shorter in duration and flies horizontally.

Important Characteristics

Following are important characteristics for this pattern.
Trendlines
For Pennants, the price trendlines tend to converge. At the start of the Pennant, the price spikes, perhaps in response to a favorable product or earnings announcement. Following the price spike, the price fluctuations continue until they taper out and become decreasingly less volatile. This behavior appears on a price chart with the initial price spike forming what technical analysts refer to as the “mast” of the Pennant, followed by a triangular pennant shape.

 

Volume
As the Pennant develops, the volume tends to decrease. Martin Pring notes in his book, Technical Analysis Explained, “a pennant is in effect a very small triangle. If anything, volume tends to contract even more during the formation of a pennant than during that of a flag.” However, as with Flags, when the Pennant completes you will often observe a sharp spike in volume. Duration of the Pattern
In his book, Technical Analysis of the Financial Markets, John J. Murphy identifies that Pennants and Flags are relatively short-term and should be completed within one to three weeks”. He also notes that by comparison, the bullish patterns take longer to develop than the related bearish patterns.

Trading Considerations

Possibility of Price Reversal

In some rare cases, the price will break against the original price movement, and create a reversal trend. The pattern reversal may be signaled during the Pennant formation by an increase in volume, as opposed to the more typical decrease. Duration of the Pattern

The duration of the pattern depends on the extent of the price fluctuations (consolidation). The greater the fluctuations, the longer a pattern will take to develop.

Target Price

It is commonly held that the length of the mast indicates the potential price increase. Like the Flag, the Pennant is considered to be a pause in an uptrend. Following the Pennant, the price typically jumps to replicate the height of the mast, while continuing in the direction of the inbound trend.

Criteria that Supports

Volume

Volume should diminish noticeably as the pattern forms.

A strong volume spike on the day of the pattern confirmation is a strong indicator in support of the potential for this pattern. The volume spike should be significantly above the average of the volume for the duration of the pattern. In addition, the volume over the course of the pattern should be declining on average.

Criteria that Refutes

Duration of the Pattern

According to Martin Pring, a pattern that exceeds “4 weeks to develop should … be treated with caution”. After 4 weeks, interest in the stock is likely to decrease to point that it is unlikely to continue in a strong uptrend. No Volume Spike on Breakout

The lack of a volume spike on the day of the pattern confirmation is an indication that this pattern may not be reliable. In addition, if the volume has remained constant, or was increasing, over the duration of the pattern, then this pattern should be considered less reliable and may actually reverse.

Underlying Behavior

This pattern is effectively a pause in an uptrend. The price has moved ahead of itself with a steep rise; therefore market activity takes a break before continuing the uptrend. This pause is reflected in the decreasing trading volume. Similarly, a spike in volume marks the resumption of the uptrend.

Round Bottom Chart Pattern

Implication

A Rounded Bottom is considered a bullish signal, indicating a possible reversal of the current downtrend to a new uptrend.

Description

Rounded Bottoms are elongated and U-shaped, and are sometimes referred to as rounding turns, bowls or saucers. The pattern is confirmed when the price breaks out above its moving average.

                      

Important Characteristics

Following are important characteristic to look for in a Rounded Bottom.

Shape

The price pattern forms a gradual bowl shape. There should be an obvious bottom to the bowl. Price can fluctuate or be linear; however, the overall curve should be smooth and regular, without obvious spikes. For example, a V-shaped turn would not be considered a rounded bottom.

Volume

Volume tends to mirror the price pattern. Consequently, as the rounded bottom begins to descend, volume tends to decrease as bearishness wanes and investors become indecisive. Following a period of relative inactivity, at the bottom of the bowl, the price pattern starts its upward turn. As sentiment becomes more decisively bullish, volume tends to increase. When looking at volume in a rounded bottom pattern, Robert D. Edwards and John Magee note that “volume accelerates with the [price] trend until often it reaches a sort of climactic peak in a few days of almost ‘vertical’ price movement on the chart.”

Duration of the Rounded Bottom

Rounded Bottoms are long-term patterns. Martin J. Pring identifies that the pattern can occur over a period of about 3 weeks, but can also be observed over several years.

Trading Considerations

Duration of the Pattern

The duration of the pattern indicates the significance of the price movement. John J. Murphy writes that rounded bottoms “are usually spotted on weekly or monthly charts that span several years. The longer they last, the more significant they become.”

Target Price

Understandably, investors like to buy at the lowest possible price. However, even the most promising-looking rounded bottoms patterns can fail. To determine whether a downturn has bearish potential, watch the price at the bottom of the downturn. For a rounded bottom, the price tends to hover and bounce between an upper and lower price limit. You may observe this behavior for weeks or even years, as knowledgeable investors accumulate stock at the lowest possible price.

Clifford Pistolese advises that, “If well-informed, long-term investors are buying within the trading range, the eventual breakout will probably be to the upside.” To manage risk, both Pistolese and Thomas N. Bulkowski suggest that investors buy stock when the breakout actually occurs.

Price may end higher or lower than it was at the beginning of the formation. After an upside breakout, technical analysts may use the starting price at the left side of the bowl to determine where the price may head. However, you will want to monitor the stock with interest.

Criteria that Supports

Volume

Volume should parallel the price formation, dropping off as the pattern reaches the bottom, then increasing as the new uptrend is established.

Moving Average

Moving averages help to determine whether the rounded bottom has the potential for an upside breakout. For a rounded bottom, the price should cross the moving average when it begins to ascend. When this crossover occurs, the pattern is “confirmed”.

There is an abundance of literature about moving averages if you are interested in understanding how they operate. In simple terms, the moving average can be used to detect a possible pattern success or failure. Typically, a moving average represents the closing price of a stock over a specified number of days, and can be used to predict the general direction of a stock. Depending on the type of stock, investors may decide to use a long, medium or short term moving average. For example, short duration patterns generally use a 50-day moving average, and longer patterns generally use a 200-day moving average.

Criteria that Refutes

Shape

A formation is not a true rounded bottom when it does not involve a period of consolidation. Consolidation occurs following the descent when the price at the bottom of the pattern seems to bounce between an upper and lower limit. While, there are V-shaped patterns that yield successful returns, the rounded bottoms are a more reliable and predictable formation.

Underlying Behavior

A Rounded Bottom forms as investor sentiment shifts gradually from bearishness to bullishness. As the sentiment turns down toward the bottom, there is a drop off in trading volume due to the indecisiveness in the market. There is a period of consolidation at the bottom as trading bounces within a certain range, then finally there is a gradual upturn marking the shift to bullishness. As investors become more decisive about the bullishness, there is an increase in trading volume.

 

 

Symmetrical Continuation Triangle (Bullish)

Symmetrical Triangle Chart Pattern

Introduction

The triangle pattern, also called the “coil,” appears in three varieties:

1. symmetrical, 2. ascending, and 3. descending.

Generally, a triangle pattern is considered to be a continuation or consolidation pattern. Sometimes, however, the formation marks a reversal of a trend.

Symmetrical triangles are generally considered neutral, ascending triangles are bullish, and descending triangles are bearish. From a time perspective, triangles are usually considered to be intermediate patterns. Usually, it takes longer than a month to form a triangle. Seldom will a triangle last longer than three months. If a triangle pattern does take longer than three months to complete, Murphy advises that the formation will take on major trend significance.

What does a symmetrical triangle look like?

Converging trendlines of support and resistance gives the triangle pattern its distinctive shape. This occurs, Kahn explains, because “the trading action gets tighter and tighter until the market breaks out with great force.” Buyers and sellers find themselves in a period where they are not sure where the market is headed. Their uncertainty is marked by their actions of buying and selling sooner, making the pattern look like an increasingly tight coil moving across the chart.

As the range between the peaks and troughs marking the progression of price narrows, the trendlines meet at the “apex,” located at the right of the chart. The “base” of the triangle is the vertical line at the left of the chart which measures the vertical height of the pattern.

A symmetrical triangle shows two converging trendlines, one is ascending, the other is descending – creating a sideways symmetrical triangle. The formation occurs because prices are making both lower highs and higher lows. Elaine Yager, Director of Technical Analysis at Investec Ernst and Company in New York and a member of Recognia’s Board of Advisors, notes that the pattern should display two highs and two lows, all touching the trendline as – a minimum of four reversal points is necessary to draw the two converging trendlines. The diagram has these points noted.
Bulkowski divides symmetrical triangles into two groups:

1. symmetrical bottoms – prices trend down then form lower highs and higher lows. Breakout can be either downward or upward. 2. symmetrical tops – prices trend up then form lower highs and higher lows. Breakout can be either downward or upward.

Why is the symmetrical triangle pattern important?

A symmetrical triangle pattern is relatively easy to identify. In addition, triangle patterns can be quite reliable to trade with very low failure rates. There is a caution concerning trading these patterns, however. As mentioned previously, a triangle pattern can be either continuation or reversal patterns. Typically, they are continuation patterns. To achieve the reliability for which the triangle is well known, technical analysts advise waiting for a clear breakout of one of the trendlines defining the triangle.
Triangle patterns are usually susceptible to definite and dependable analysis, with the proviso that the investor must wait for a reliable, as opposed to a premature, breakout. Bulkowski advises that, in general, the failure rate for triangles drops significantly if the investor waits for a valid breakout and, once that breakout occurs, the pattern proves strongly reliable.
Murphy advises that a minimum penetration criterion would be a closing price outside the trendline and not just an intraday penetration. Similarly, Schabacker warns of the “false moves” and “shake-outs” which most commonly attend the triangle.

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Is volume important in a symmetrical triangle pattern?
Volume is an important factor to consider when determining whether a formation is a true triangle. Typically, volume follows a reliable pattern: volume should diminish as the price swings back and forth between an increasingly narrow range of highs and lows. However, when breakout occurs, there should be a noticeable increase in volume. If this volume picture is not clear, investors should be cautious about whether the pattern is a true triangle.
This traditional volume pattern develops because of investor sentiment during the creation of a triangle. Investors are uncertain. This uncertainty means that they are buying and selling sooner, which translates into a narrowing of the highs and lows, creating the “coil” shape, indicative of the triangle . Because investors are uncertain, many are holding on to their stocks, awaiting the market’s next move. When breakout finally does occur, there’s a surge in market activity because investors are finally certain enough about the direction of the market to release their pent-up supply or demand.

What are the details that I should pay attention to in a symmetrical triangle pattern?
1. Occurrence of a Breakout – Technical analysts pay close attention to how long the triangle takes to develop to its apex. The general rule, as explained by Murphy, is that prices should break out – clearly penetrate one of the trendlines – somewhere between three-quarters and two-thirds of the horizontal width of the formation.6 The break out, in other words, should occur well before the pattern reaches the apex of the triangle. . Adherence to this rule is strongly advised by Yager, She adds that the closer the breakout occurs to the apex the higher the risk of a false breakout.
To take the measurement, begin by drawing the two converging trendlines. Measure the length of the triangle from its base to the apex. Next, plot the distance along the horizontal width of the pattern where the breakout should take place. If prices remain within the trendlines beyond the three-quarters point of the triangle, technical analysts will approach the triangle with caution. In much the same manner as Yager, Murphy warns that if prices don’t breakout of the trendlines before that point, the triangle “begins to lose its potency and prices will simply drift out beyond the apex with no surge in either direction.
2. Price Action – Unlike ascending and descending triangles which give advance notice of their intentions, the symmetrical triangle tends to be a neutral pattern. Murphy advises that the symmetrical triangle is generally a consolidation pattern. This means an investor can look to see the direction of the previous trend and make the basic assumption that the trend will continue. However, many experts advise investors that because the breakout direction could go either way that they wait until the breakout occurs before investing in or selling the stock. Schabacker refers to a symmetrical triangle as a “picture of hesitation.
3. Measuring the Triangle – To project the minimum short-term price objective of a triangle, an investor must wait until the price has broken through the trendline. When the price breaks through the trendline, the investor then knows whether the pattern is a consolidation or a reversal formation.
To calculate the minimum price objective, calculate the “height” of the formation at its widest part – the “base” of the triangle. The height is equal determined by projecting a vertical line from the first point of contact with the trendline on the left of the chart to the next point of contact with the opposite trendline. In other words, measure from the highest high point on one trendline to the lowest low point on the opposite trendline.
Both these points will be located on the far left of the formation. Next, locate the “apex” of the triangle (the point where the trendlines converge). Take the result of the measurement of the height of the triangle and add it to the price marked by the apex of the triangle if an upside breakout occurs and subtract it from the apex price if the triangle experiences a downside breakout.
For example, working with a symmetrical triangle, assume the highest high of the pattern occurs at 100 and the lowest low at 80. The height of the pattern is 20 (100 – 80 = 20). The apex of the triangle occurs at 90. The pattern has an upside breakout. Using the measuring rule, the target price is 110 (90 + 20 = 110).

4. Duration of the Triangle – As mentioned before, the triangle is a relatively short-term pattern. It may take up to one month to form and it usually forms in less than three months.

5. Forecasting Implications – Once breakout occurs, the symmetrical triangle tends to be a reliable pattern. Bulkowski calculates failure rates ranging between 2% and 6% for symmetrical triangles after a valid breakout.

6. Shape of Symmetrical Triangle – The pattern should display two highs and two lows, all touching the trendline – a minimum of four reversal points is necessary to draw the two converging trendlines.

7. Volume – Investors should see volume decreasing as the pattern progresses toward the apex of the triangle. At breakout, however, there should be a noticeable increase in volume. Like reversal patterns, volume is more important on the upside than the downside. Therefore, an investor will be particularly interested in seeing an increase in volume on breakout if the pattern is moving upwards. Similarly, if prices are experiencing an uptrend, investors should be looking for volume to increase as prices move up and fall as prices fall back.

8. Premature or False Breakouts – Bulkowski calls them “premature” false breakouts and Schabacker refers to them as “false moves” or “shake-outs.” Both agree that triangles are among the patterns most susceptible to this phenomenon. Because the pattern can be either a reversal or continuation pattern, investors are particularly susceptible to false moves or, at the very least, confused by them. In addition, because volume becomes so thin as the triangle formation progresses to the apex, it takes very little activity to bring about an erratic and false movement in price, taking the price outside of the trendlines.
To avoid taking an inadvisable position in a stock, some investors advise waiting a few days to determine whether the breakout is a valid one. Typically, a false move corrects itself within a week or so. A key sign of a possible false move is low volume. If there’s no pick up in volume around the breakout, investors should be wary. Typically, a good breakout from a triangle formation will be accompanied by a definite surge in volume.
There are situations, however, where a false move will occur with high volume. According to Schabacker, these are the most dangerous variety of false moves. The only advice experts can give to investors who fall prey to one of these false moves is to reverse their positions as soon as they become aware of the true movement of the stock.
It is also advisable to be increasingly suspicious of triangle patterns where the breakout occurs very close to the apex. Because trading is so thin at this point, there is an increased likelihood that a false move could occur. Also, false moves are more likely with symmetrical triangles, maintains Schabacker.  With the right-angle triangles, the trend is suggested by the pattern itself. Therefore, a deviation from that trend is more likely to raise the suspicion that it may be a “false move.”

How can I trade this pattern?
Edwards and Magee offer different trading strategies depending on whether you already have a position in the stock or whether you do not have a position in a stock experiencing a triangle formation. If an investor already has a position in a stock, he or she may be “locked” into that position as the formation takes shape because it is not possible to definitively predict which way the breakout will take the price of the stock. The key is waiting and watching for a valid breakout before making an investment decision.
If an investor does not have a position in a stock, Edwards and Magee advise staying away from the stock when it’s in the process of forming the triangle pattern. Consider a position when a dependable breakout has occurred. “After such a breakout, if on the upside, buy on the next reaction if the Major Trend is up, or if on the downside, sell short on the next rally if the Major Trend is down.”
Given contradictory nature of the direction of breakouts from triangles, all experts advise caution with triangles while they’re in the process of forming. (“. . . it might be better policy to note such formations in the making, and wait until the decisive breakout before making the new commitment.”) Once a valid breakout has been detected, however, the same experts agree that triangles are a reliable pattern to trade. As mentioned, this pattern has a tendency to premature breakouts and false moves.

To avoid mistaking a false move for a valid breakout, experts advise waiting a few days to see if the breakout is dependable. According to Murphy, a minimum penetration criteria would be a closing price outside the trendline and not just an intraday penetration. Investors do have time once a breakout has occurred.18 According to Bulkowski, when considering symmetrical triangles, an investor will have over five months to reach the ultimate high after an upside breakout and less than half that time after a downside breakout.
Because premature breakouts (where prices close outside of the trendline) are so common, don’t dismiss the pattern if it has experienced such a breakout. According to Bulkowski, however, “premature breakouts do not predict the final breakout direction or success or failure of the formation.”
Be wary of breakouts from triangles where the breakout does not occur until the apex of the triangle. Experts, including Edwards and Magee, maintain that the most reliable breakouts occur about two-thirds of the way along the triangle.
The triangle pattern should not show too much “white space,” states Bulkowski. If there’s too much white space in the middle portion of the triangles created as price moves from lows to highs, then the pattern may not be a triangle. In a valid triangle, price should bounce back and forth in a fairly regular pattern, as price moves toward the apex.
Bulkowski advises that it is very common for a triangle formation to experience a throwback (where prices break upward and then fall back to the formation) or a pullback (where prices break downward and then rise up again to meet the formation). Throwbacks and pullbacks tend to complete within a couple of weeks and the breakout continues as before.

Converging trendlines of support and resistance gives the triangle pattern its distinctive shape. The “Bullish” triangle has 2 “peeks” on the resistance line and 3 waves on the bottom “support line”.

Example

Triple Bottom Chart Pattern

A triple bottom pattern displays three distinct minor lows at approximately the same price level. The triple bottom is considered to be a variation of the head and shoulders bottom. Like that pattern, the triple bottom is a reversal pattern.
The only thing which differentiates a triple bottom from a head and shoulders bottom is the lack of a “head” between the two shoulders. The triple bottom illustrates a downtrend in the process of becoming an uptrend. It is, therefore, vital to the validity of the pattern that it commence with prices moving in a downtrend.
Elaine Yager, Director of Technical Analysis at Investec Ernst and Company in New York and a member of Recognia’s Board of Advisors goes further to say that this pattern must commence with prices moving in a major downtrend – one that has lasted for one year or more.

What does a triple bottom look like?
As illustrated below, the triple bottom pattern is composed of three sharp lows, all at about the same price level. Prices fall to a support level, rise, fall to that support level again, rise, and finally fall, returning to the support level for a third time before beginning an upward climb. In the classic triple bottom, the upward movement in the price marks the beginning of an uptrend.

Investors should note that the three lows tend to be sharp. When prices hit the first low, sellers become scarce, believing prices have fallen too low. If a seller does agree to sell, buyers are quick to buy at a good price. Prices then bounce back up. The support level is established and the next two lows also are sharp and quick. Bulkowski points out that the sharp lows are often only one-day spikes.
While the three lows should be sharp and distinct, the highs of the pattern can appear to be rounded. The pattern is complete when prices rise about the highest high in the formation. The highest high is called the “confirmation point.”
This pattern, the experts warn, can be easily confused with other similar patterns. For example, if the center low is lower than the other two, the pattern may be a head and shoulders bottom. Also, if the three bottoms are successively higher or lower than one another, the pattern may be a triangle formation.
Because the pattern is easy to confuse, an investor should look for three sharp lows which are well separated and not part of a larger congestion pattern. In addition, between the lows, the highs should be fairly rounded in shape, although it is not absolutely necessary to the validity of the pattern. If the pattern fails to move up and break through the confirmation point after reaching the third low, the pattern is not a valid triple bottom.

Why is this pattern important?
Like the head and shoulders bottom which it so closely resembles, the triple bottom is considered to be a reliable pattern. Bulkowski estimates the failure rate to be a low 4%, assuming that an investor waits for the upside breakout through the confirmation point.

Is volume important in a triple bottom?
Generally, volume in a triple bottom tends to trend downward as the pattern forms. Volume tends to be lighter on each successive low. Volume then picks up as prices rise above the confirmation point and break into the new upward trend.
An investor should not dismiss a triple bottom if volume does not display this pattern. The pattern can take several months to form and, during that time, volume can be irregular and unpredictable. Volume should be higher at the lows than on the days leading to the lows.

What are the details that I should pay attention to in the triple bottom?
1. Duration of the Pattern
The average formation takes approximately four months to develop. The triple bottom is one of the longer patterns to develop. Schabacker and Murphy agree, however, that the longer the pattern takes to form, the greater the significance of the price move once breakout occurs.
2. Need for a Downtrend
The triple bottom is a reversal pattern. This means it is essential to the validity of the pattern that it begin with a downward trend in a stock’s price. As Yager noted above, some experts believe the downtrend must be a major one.
3. Decisive Breakout
Because a triple bottom can be confused with many other patterns as it is developing, experts advise that investors wait for a valid breakout through the confirmation point before deciding whether the pattern is a true triple bottom. Bulkowski reinforces this message, stating that true triple bottoms are quite rare and waiting for a valid breakout is essential before determining whether the pattern is a triple bottom.
4. Volume
As discussed, it is typical to see volume diminish as the pattern progresses. This should change, however, when breakout occurs. A valid breakout should be accompanied by a burst in volume. Certain experts are less concerned by seeing a steadily diminishing trend in volume as the pattern progresses through its three lows.
5. Pullback after Breakout
It is very common in the triple bottom to see a pullback after the breakout. Bulkowski estimates that 70% of triple bottoms will throw back to the breakout price.

 

How can I trade this pattern?
Begin by calculating the target price – the minimum expected price move. The triple bottom is measure in a way similar to that for the head and shoulders bottom.
Calculate the height of the pattern by subtracting the lowest low from the highest high in the formation. Then, add the height to the highest high. In other words, an investor can expect the price to move upwards at least the distance from the breakout point plus the height of the pattern.
For example, assume the lowest low of the triple bottom is 200 and the highest high is 240. The height of the pattern is 40 (240 – 200 = 40). The minimum target price is 280 (240 + 40 = 280).
Experts agree that triple bottoms are not that common.

Edwards and Magee, for example, stress the necessity for waiting for a valid breakout through the confirmation point.However, this is a reliable pattern if the pattern has been confirmed by a valid breakout. Pullbacks are common with triple bottoms. Investors can use this to their favor advises Bulkowski. If prices return to the confirmation point quickly after the breakout (within two weeks but no more than a month), Bulkowski suggests that the time to jump in is once the prices have turned around again and headed back up.
Investors looking for a valid triple bottom should be wary of a pattern that shows a lot of white space as it is developing. The pattern should display a fairly regular progression among the three, well-separated lows. Yager suggests that the symmetry of this pattern is something that should catch your eye.

 

 

 

Upside Breakouts Chart Patterns

Implication

An Upside Breakout is considered a bullish signal, marking a breakout from a trading range to start a new uptrend.

Description

An Upside Breakout occurs when the price of a financial instrument breaks out through the top of a trading range. This Technical Analysis indicates that prices will rise explosively over a period of days or weeks as an almost vertical uptrend appears.

Trading Considerations

Inbound Trend

The inbound trend is an important characteristic of the pattern. A shallow inbound trend may indicate a period of consolidation before the price move indicated by the pattern begins. Look for an inbound trend that is longer than the duration of the pattern. A good rule of thumb is that the inbound trend should be at least two times the duration of the pattern.

Criteria that Supports

Duration of Trading Range

The duration of the trading range for which the breakout occurred can provide an indication of the strength of the breakout. The longer the duration of the trading range the more significant the breakout.

Narrowness of Trading Range

The “narrowness” of the trading range can also be used to gauge the breakout. To determine the narrowness of the trading range compare the upper boundary with the lower boundary of the trading range. If the trading range has a small difference between the upper and lower boundary (making it narrow) then the breakout is considered stronger and more reliable.

Support or Resistance

Look for a region of support or resistance around the target price. A region of price consolidation or a strong Support and Resistance Line at or around the target price is a strong indicator that the price will move to that point.

Moving Average

Prices which quickly move 50% above the 200-day Moving Average strongly support this pattern.

Moving Average Trend

Look at the direction of the Moving Average Trend. For short duration patterns use a 50 day Moving Average, for longer patterns use a 200 day Moving Average. The Moving Average should change direction within the duration of the pattern and should now be heading in the direction indicated by the pattern.

Volume

A strong volume spike on the day of the pattern confirmation is a strong indicator in support of the potential for this pattern. The volume spike should be significantly above the average of the volume for the duration of the pattern. In addition, the volume during the duration of the pattern should be declining on average.

Criteria that Refutes

Duration of the Trading Range

The duration of the trading range for which the breakout occurred can provide an indication of the strength of the breakout. The shorter the duration of the trading range the less significant the breakout.

Narrowness of the Trading Range

The “narrowness” of the trading range can also be used to gauge the breakout. To determine the narrowness of the trading range compare the upper boundary with the lower boundary of the trading range. If the trading range has a large difference between the upper and lower boundary (making it wide) then the breakout is considered weaker and less reliable.

No Volume Spike on Confirmation

The lack of a volume spike on the day of the pattern confirmation is an indication that this pattern may not be reliable. In addition, if the volume has remained constant, or was increasing, over the duration of the pattern, then this pattern should be considered less reliable.

Moving Average Trend

Look at the direction of the Moving Average Trend. For short duration patterns use a 50 day Moving Average, for longer patterns use a 200 day Moving Average. A Moving Average that is trending in the opposite direction to that indicated by the pattern is an indication that this pattern is less reliable.

Short Inbound Trend

An inbound trend that is significantly shorter than the pattern duration is an indication that this pattern should be considered less reliable.

 

 

Continuation Diamond Chart Pattern Bearish

 

 

Implication

A Continuation Diamond (Bearish) is considered a bearish signal, indicating that the current downtrend may continue.

Description

Diamond patterns usually form over several months in very active markets. Volume remains high during the formation of this pattern. The Continuaton Diamond (Bearish) indicates a possible continuation of a downtrend.

The Continuation Diamond (Bearish) pattern occurs because prices create higher highs and lower lows in a broadening pattern. Then the trading range gradually narrows after the highs peak and the lows start trending upward. The Technical Analysis occurs when prices break downward out of the diamond formation to continue the prior downtrend.

 

Trading Considerations

Duration of Pattern

Consider the duration of the pattern and its relationship to your trading time horizons. The duration of the pattern is considered to be an indicator of the duration of the influence of this pattern. The longer the pattern the longer it will take for the price to move to its target. The shorter the pattern the sooner the price move. If you are considering a short-term trading opportunity, look for a pattern with a short duration. If you are considering a longer-term trading opportunity, look for a pattern with a longer duration.

Target Price

The target price provides an important indication about the potential price move that this pattern indicates. Consider whether the target price for this pattern is sufficient to provide adequate returns after your costs (such as commissions) have been taken into account. A good rule of thumb is that the target price must indicate a potential return of greater than 5% before a pattern should be considered useful. However you must consider the current price and the volume of shares you intend to trade. Also, check that the target price has not already been achieved.

Inbound Trend

The inbound trend is an important characteristic of the pattern. A shallow inbound trend may indicate a period of consolidation before the price move indicated by the pattern begins. Look for an inbound trend that is longer than the duration of the pattern. A good rule of thumb is that the inbound trend should be at least 2 times the duration of the pattern.

Criteria that Supports

Support and Resistance

Support can be found at the turning point of the lows and resistance at the top peak of the Diamond.

Criteria that Refutes

No Volume

A lack of a volume throughout the pattern is an indication that this pattern may not be reliable.

Short Inbound Trend

An inbound trend that is significantly shorter than the pattern duration is an indication that this pattern should be considered less reliable.

 

 

 

 

 

 

 

 

 

 

 

 

Continuation Wedge (Bearish)

Rising Wedge (Bearish) Classic Pattern

Implication
A Continuation Wedge (Bearish) is considered a bearish signal, indicating that the current downtrend may continue.

Description
A Continuation Wedge (Bearish) consists of two converging trend lines. The trend lines are slanted upward. Unlike the Triangles where the apex is pointed to the right, the apex of this pattern is slanted upwards at an angle. This is because prices edge steadily higher in a converging pattern i.e. there are higher highs and higher lows. A bearish signal occurs when prices break below the lower trendline.

Over the weeks or months that this pattern forms the trend appears upwards but the long-term range is still downward.

 

Volume should diminish as the pattern forms.

Trading Considerations
Pattern Duration
Consider the duration of the pattern and its relationship to your trading time horizons. The duration of the pattern is considered to be an indicator of the duration of the influence of this pattern. The longer the pattern the longer it will take for the price to move to the Target. The shorter the pattern the sooner the price move. If you are considering a short-term trading opportunity, look for a pattern with a short duration. If you are considering a longer-term trading opportunity, look for a pattern with a longer duration.
Target Price
The target price provides an important indication about the potential price move that this pattern indicates. Consider whether the target price for this pattern is sufficient to provide adequate returns after your costs (such as commissions) have been taken into account. A good rule of thumb is that the target price must indicate a potential return of greater than 5% before a pattern should be considered useful. However you must consider the current price and the volume of shares you intend to trade. Also, check that the target price has not already been achieved.

Criteria that Supports
Volume
Volume should diminish as the pattern forms.

Criteria that Refutes
Moving Average
The penetration of the 200-day Moving Average by the price is a false bull signal.
Rising or Stable Volume
Volume should diminish as the pattern forms. If volume remains the same or increases this signal is less reliable.

Underlying Behavior

In this pattern prices edge steadily higher in a converging pattern i.e. there are higher highs and higher lows indicating that bulls are winning over bears. However, at the breakout point the bears emerge the victors and the price descends.

 

 

 

 

 

 

 

 

 

 

 

Descending Continuation Triangle Chart Pattern

Implication

A Descending Continuation Triangle is considered a bearish signal, indicating that the current downtrend may continue.

Description

A Descending Continuation Triangle features two converging trendlines. The bottom trendline is horizontal and the top trendline slopes downward. The pattern illustrates lows occurring at a constant price level, with highs moving constantly lower. The pattern displays two highs touching the upper trendline and two lows touching the lower trendline.

This pattern is confirmed when the price breaks out of the triangle formation to close below the lower trendline.

 

Volume is an important factor to consider. Typically, volume follows a reliable pattern: volume should diminish as the price swings back and forth between an increasingly narrow range of highs and lows. However, when breakout occurs, there should be a noticeable increase in volume. If this volume picture is not clear, investors should be cautious about decisions made based on this pattern.

important Characteristics

Following are important characteristics about this pattern.

Occurrence of a Breakout

Technical analysts pay close attention to how long the Triangle takes to develop to its apex. The general rule is that prices should break out – clearly penetrate the lower trendline – somewhere between three-quarters and two-thirds of the horizontal width of the formation. The break out, in other words, should occur well before the pattern reaches the apex of the Triangle. The closer the breakout occurs to the apex the less reliable the formation.

Duration of the Triangle

The Triangle is a relatively short-term pattern. It may take from one to three months to form.

Shape of Descending Triangle

The horizontal bottom trendline need not be completely horizontal.

 

Volume

Investors should see volume decreasing as the pattern progresses toward the apex of the Triangle. At breakout, however, there should be a noticeable increase in volume.

 

Trading Considerations

Duration of Pattern

Consider the duration of the pattern and its relationship to your trading time horizons. The duration of the pattern is considered to be an indicator of the duration of the influence of this pattern. The longer the pattern the longer it will take for the price to reach its target. The shorter the pattern the sooner the price moves. If you are considering a short-term trading opportunity, look for a pattern with a short duration. If you are considering a longer-term trading opportunity, look for a pattern with a longer duration.

Target Price

The target price provides an important indication about the potential price move that this pattern indicates. Consider whether the target price for this pattern is sufficient to provide adequate returns after your costs (such as commissions) have been taken into account. A good rule of thumb is that the target price must indicate a potential return of greater than 5% before a pattern should be considered useful. However you must consider the current price and the volume of shares you intend to trade. Also, check that the target price has not already been achieved.

Inbound Trend

The inbound trend is an important characteristic of the pattern. A shallow inbound trend may indicate a period of consolidation before the price move indicated by the pattern begins. Look for an inbound trend that is longer than the duration of the pattern. A good rule of thumb is that the inbound trend should be at least 2 times the duration of the pattern.

 

Criteria that Supports

Look for a region of support at the bottom trendline and a line of resistance at the highest high of the Triangle.

Moving Average

Compare prices to the 200 day Moving Average. When prices are close to or touch the 200 day Moving Average this signal is considered stronger.

Volume

A strong volume spike on the day of the pattern confirmation is a strong indicator in support of the potential for this pattern. The volume spike should be significantly above the average of the volume for the duration of the pattern. In addition, the volume during the duration of the pattern should be declining on average.

Criteria that Refutes

No Volume Spike on Breakout

The lack of a volume spike on the day of the pattern confirmation is an indication that this pattern may not be reliable. In addition, if the volume has remained constant, or was increasing, over the duration of the pattern, then this pattern should be considered less reliable.

Short Inbound Trend

An inbound trend that is significantly shorter than the pattern duration is an indication that this pattern should be considered less reliable.

Underlying Behavior

This pattern with its increasingly higher highs and constant lows indicates that sellers are more aggressive than buyers.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diamond Top Chart Pattern

 

 

Implication

A Diamond Top is considered a bearish signal, indicating a possible reversal of the current uptrend to a new downtrend.

Description

Diamond patterns usually form over several months in very active markets. Volume remains high during the formation of this pattern. The Diamond Top indicates a reversal to a downtrend.

The Diamond Top pattern occurs because prices create higher highs and lower lows in a broadening pattern. Then the trading range gradually narrows after the highs peak and the lows start trending upward. The Technical Analysis occurs when prices break downward out of the diamond formation.

Trading Considerations

Duration of Pattern

Consider the duration of the pattern and its relationship to your trading time horizons. The duration of the pattern is considered to be an indicator of the duration of the influence of this pattern. The longer the pattern the longer it will take for the price to move to its target. The shorter the pattern the sooner the price move. If you are considering a short-term trading opportunity, look for a pattern with a short duration. If you are considering a longer-term trading opportunity, look for a pattern with a longer duration.

Target Price

The target price provides an important indication about the potential price move that this pattern indicates. Consider whether the target price for this pattern is sufficient to provide adequate returns after your costs (such as commissions) have been taken into account. A good rule of thumb is that the target price must indicate a potential return of greater than 5% before a pattern should be considered useful. However you must consider the current price and the volume of shares you intend to trade. Also, check that the target price has not already been achieved.

 

Inbound Trend

The inbound trend is an important characteristic of the pattern. A shallow inbound trend may indicate a period of consolidation before the price move indicated by the pattern begins. Look for an inbound trend that is longer than the duration of the pattern. A good rule of thumb is that the inbound trend should be at least 2 times the duration of the pattern.

Criteria that Supports

Support and Resistance

Support can be found at the turning point of the lows and resistance at the top peak of the Diamond.

Moving Average

Watch for the 200-day Moving Average to flatten out. Then watch for the 50-day Moving Average to cross below the 200-day Moving Average. This should signal the breakout.

Criteria that Refutes

No Volume

A lack of a volume throughout the pattern is an indication that this pattern may not be reliable.

Short Inbound Trend

An inbound trend that is significantly shorter than the pattern duration is an indication that this pattern should be considered less reliable.

 

 

 

 

 

 

 

 

 

 

 

 

 

Double Top Stock Chart Pattern

Introduction
A double top occurs when prices form two distinct peaks on a chart. A double top is only complete, however, when prices decline below the lowest low – the “valley floor” – of the pattern.

The double top is a reversal pattern of an upward trend in a stock’s price. The double top marks an uptrend in the process of becoming a downtrend.
Sometimes called an “M” formation because of the pattern it creates on the chart, the double top is one of the most frequently seen and common of the patterns. Because they seem to be so easy to identify, the double top should be approached with caution by the investor.
According to Schabacker, the double top is a “much misunderstood formation.” Many investors assume that, because the double top is such a common pattern, it is consistently reliable. This is not the case. Schabacker estimates that probably not more than a third of them signal reversal and that most patterns which an investor might call a double top are not in fact that formation.2 Bulkowski estimates the double top has a failure rate of 65%. If an investor waits for the breakout, however, the failure rate declines to 17%.
The double top is a pattern, therefore, that requires close study for correct identification.

What does a double top look like?

As illustrated below, a double top consists of two well-defined, sharp peaks at approximately the same price level. A double top occurs when prices are in an uptrend. Prices rise to a resistance level, retreat, return to the resistance level again before declining. The two tops should be distinct and sharp. The pattern is complete when prices decline below the lowest low in the formation. The lowest low is called the confirmation point.

Analysts vary in their specific definitions of a double top. According to some, after the first top is formed, a reaction of at least 10% should follow. That decline is measured from high to low.

According to Edwards and Magee, there should be at least a 15% decline between the two tops, on diminishing activity. The second rally back to the previous high (plus or minus 3%) should be on lower volume than the first. Other analysts maintain that the decline registered between the two tops should be at least 20% and the peaks should be spaced at least a month apart.
There are a few points of agreement, however. Investors should ensure that the pattern is in fact comprised of two distinct tops and that they should appear near the same price level. Tops should have a significant amount of time between them -ranging from a few weeks to a year. Investors should not confuse a consolidation pattern with a double top. Finally, it is crucial to the completion of the reversal pattern that prices close below the confirmation point.

Why is this pattern important?

According to Murphy, the double top is one of the most frequently seen and most easily recognized.However, analysts agree that this can be a difficult pattern to correctly identify. Investors must pay close attention to the volume during the formation of the pattern, the amount of decline between the two peaks, and the time the pattern takes to develop on the chart.

A double top often forms in active markets, experiencing heavy trading. A stock’s price heads up rapidly on high volume. Demand falls off and price falls, often remaining in a trough for weeks or months. A second run-up in the price occurs taking the price back up to the level achieved by the first top. This time volume is heavy but not as heavy as during the first run-up. Stock prices fall back a second time, unable to pierce the resistance level. These two sharp advances with relatively heavy volume have exhausted the buying power in the stock. Without that power behind it, the stock reverses its upward movement and falls into a downward trend.

Is volume important in a double top?

Investors should pay close attention to volume when analyzing a double top.

Generally, volume in a double top is usually higher on the left top than the right. Volume tends to be downward as the pattern forms. Volume does, however, pick up as the pattern hits its peaks. Volume increases again when the pattern completes, breaking through the confirmation point.

Monitoring volume is a key aspect of determining whether or not a double top is valid. Schabacker insists that the volume rule must be applied quite strictly in the case of a double top. The first top must be made with noticeably high volume. The second top must also experience high volume but it need not achieve the level of the first top. In fact, Schabacker points out that the second top is often made on only a slight increase over the average volume during the interval between the tops.
Bulkowski explains that volume does not need to be high on the breakout. When a breakout occurs with high volume, however, prices tend to decline further.

Elaine Yager, Director of Technical Analysis at Investec Ernst and Company in New York and a member of Recognia’s Board of Advisors, notes that the right-hand side of the pattern is the area to watch most closely. She watches for diminishing volume until the confirmation point at which point the volume should increase. However, Yager notes that this pattern is often traded with or without the volume increase on the right hand peak.

What are the details that I should pay attention to in the double top?
1. Uptrend Preceding Stock Chart

As mentioned previously, the double top is a reversal formation. It begins with prices in an uptrend. Analysts focus on specific characteristics of that uptrend when searching for a valid double top. The trend upwards should be fairly long and healthy. Bulkowski maintains that an investor will want to see prices trending up over the short to intermediate term – approximately 3 to 6 months. Further, he states that “the price trend should not be a retrace in an extended decline but generally has a stair-step appearance. Schabacker confirms this approach, explaining that if the stock has been in a long, healthy uptrend, the double top is more likely to develop into a reversal. If the uptrend is short, the double top may not hold and the uptrend will continue.

2. Time between Tops

Analysts pay close attention to the “size” of the pattern – the duration of the interval between the two tops. Generally, the longer the time between the two tops, the more important the pattern as a good reversal. Schabacker warns investors off of a pattern where only a few days intervene between the two peaks.Analysts suggest that investors should look for patterns where at least one month elapses between the peaks. It is not unusual for a few months to pass between the dates of the two tops. Murphy mentions that these patterns can span several years.

On the other hand, Yager notes that patterns that are too long may be unmanageable, and she looks for tighter, shorter patterns. Yager believes that shorter patterns are viable as long as you can see the volume in the right top forming.

3. Decline from First Top

According to Schabacker, this element is even more significant to the validity of a double top than volume. He argues the decline in price that occurs between the two peaks should be consequential, amounting to approximately 20% of the price. In fact, he states that it could even be more than that but should not be much less.Other analysts are not so definite or demanding concerning the price decline. For some, including Yager, a decline of at least 10% is adequate. All agree, however, that the deeper the trough between the two tops, the better the performance of the pattern. 4. Volume
As mentioned previously, volume tends to be heaviest during the first peak, lighter on the second. It is common to see volume pick up again at the time of breakout.

5. Decisive Breakout

According to Murphy, the technical odds usually favor the continuation of the present trend.This means that it is perfectly normal market action for prices on an uptrend to peak at a resistance level a couple of times, retreat, and then resume that uptrend. It is a challenge for the analyst to determine whether the decline from a peak is the indication of the development of a valid double top or simply a temporary setback in the progression of a continuing uptrend.Analysts, therefore, advise cautious investors to wait for the price to fall back and break through the confirmation point before relying on the validity of the pattern. Many experts maintain that an investor should wait for a decisive breakout, confirmed by high volume. Others, like Bulkowski, are not so reliant on high volume at the time of breakout but do agree that the higher the volume at the time of breakout, the further the decline in prices that the pattern will register.

6. Pullback after Breakout

A pullback after the breakout is usual for a double top. Bulkowski argues that the higher the volume on the breakout, the higher the likelihood of a pullback. “When everyone sells their shares soon after a breakout, what is left is an unbalance of buying demand (since the sellers have all sold), so the price rises and pulls back to the confirmation point.”

How can I trade this pattern?

Begin by calculating the target price — the minimum expected price move. The double top is measured in a way similar to that for the head and shoulders top.
Calculate the height of the pattern by subtracting the lowest low from the highest high in the formation. Then, subtract the height of the pattern from the lowest low. In other words, an investor can expect the price to move downwards at least the distance from the breakout point less the height of the pattern.
For example, assume the lowest low of the double top is 230 and the highest high is 260. The height of the pattern equals 30 (260 – 230 = 30). The minimum target price is 200 (230 – 30 = 200).
Given the sometimes weak performance of the double top, Bulkowski suggests dividing the height in half before subtracting from the breakout point. In the above example, this would mean a target price of 215 (230 – 15 = 215).
Murphy cautions the term “double top” is greatly overused in the markets. Most of the patterns referred to as double tops are, in fact, something else. Because of this, Murphy advises investors to make their investment decisions only after prices have broken through the confirmation point, completing the reversal pattern.Watching the volume throughout the development of the pattern can help determine whether the pattern is a valid double top.
Edwards and Magee explain that patterns where the tops are close together in time are likely not valid double tops but are, in fact, a consolidation area.
Generally, analysts like to see deep troughs between the two peaks. Bulkowski advocates a valley that is at least 15% lower than the peaks.
Because so many double tops pullback after breaking through the confirmation point, it is often possible to wait for the pullback to place a trade and then watch prices decline for a second time.

Are there variations in the pattern that I should know about?
1. Two Peaks at Different Levels

Sometimes the two peaks comprising a double top are not at exactly the same price level. This does not necessarily render the pattern invalid. Murphy points out that investors should be less concerned if the second peak does not hit the high of the first peak. If the second peak is higher than the first, however, investors should show caution because the pattern may be in the process of resuming its uptrend. Analysts advise that if the second peak exceeds the first by more than 3%, the pattern may not be a double top. Similarly, if the second peak stays higher than the first peak by more than a couple of days, then the pattern may not be a true double top.

Downside Break Chart Pattern

 

Implication

A Downside Breakout is considered a bearish signal, marking a breakout from a trading range to start a new downtrend.

Description

A Downside Breakout occurs when prices break out through the bottom of a trading range and descend quickly as a new downtrend forms. It appears that the market is being flooded with sell orders. There are usually gaps throughout this activity. This pattern can last for a few days to a few weeks.

Criteria that Supports

Duration of Trading Range

The duration of the trading range for which the breakout occurred can provide an indication of the strength of the breakout. The longer the duration of the trading range the more significant the breakout.

Narrowness of Trading Range

The “narrowness” of the trading range can also be used to gauge the breakout. To determine the narrowness of the trading range compare the upper boundary with the lower boundary of the trading range. If the trading range has a small difference between the upper and lower boundary (making it narrow) then the breakout is considered stronger and more reliable.

Support and Resistance

Look for a region of support or resistance. A region of price consolidation or a strong Support and Resistance Line at or around the target price is a strong indicator that the price will move to that point.

 

Moving Average Trend

Look at the direction of the Moving Average Trend. For short duration patterns use a 50 day Moving Average, for longer patterns use a 200 day Moving Average. The Moving Average should change direction during the duration of the pattern and should head in the direction indicated by the pattern.

Volume

A strong volume spike on the day of the pattern confirmation is a strong indicator in support of the potential for this pattern. The volume spike should be significantly above the average of the volume for the duration of the pattern. In addition, the volume during the duration of the pattern should be declining on average.

Criteria that Refutes

Duration of Trading Range

The duration of the trading range for which the breakout occurred can provide an indication of the strength of the breakout. The shorter the duration of the trading range the less significant the breakout.

Narrowness of Trading Range

The “narrowness” of the trading range can also be used to gauge the breakout. To determine the narrowness of the trading range compare the upper boundary with the lower boundary of the trading range. If the trading range has a large difference between the upper and lower boundary (making it wide) then the breakout is considered weaker and less reliable.

No Volume Spike on Confirmation

The lack of a volume spike on the day of the pattern confirmation is an indication that this pattern may not be reliable. In addition, if the volume has remained constant, or was increasing, over the duration of the pattern, then this pattern should be considered less reliable.

Moving Average Trend

Look at the direction of the Moving Average Trend. For short duration patterns use a 50 day Moving Average, for longer patterns use a 200 day Moving Average. A Moving Average that is trending in the opposite direction to that indicated by the pattern is an indication that this pattern is less reliable.

 

 

 

 

 

 

 

A Flag bearish follows a steep, or nearly vertical decline in price

Flag (Bearish) Classic Pattern

Implication

A Flag (Bearish) is considered a bearish signal, indicating that the current downtrend may continue.

Description

A Flag (Bearish) follows a steep, or nearly vertical decline in price, and consists of two parallel trendlines that form a rectangular flag shape. The Flag can be horizontal (as though the wind is blowing it), however it often has a slight upward trend.

The vertical downtrend, that precedes a Flag, may occur because of buyers’ reactions to an unfavorable company announcement, such as a court case, or a sudden and unexpected departure of a CEO. The sharp price decrease is sometimes referred to as the “flagpole” or “mast”.

The rectangular flag shape is the product of what technical analysts refer to as consolidation. Consolidation occurs when the price seems to bounce between an upper and lower price limit. The Flag (Bearish) pattern formation reflects the reaction of sellers who are willing to sell at a lower cost, and the influx of buyers who inadvertently drive up the price as they compete to buy at the best possible price.

A bearish signal occurs when the price rebounds beyond the lower trendline of the Flag formation, and continues the original downward price movement. This is considered a pattern confirmation.

When speaking about Flags, technical analysts may use jargon and refer to the flag as “flying at half-mast”. Visually, this reference is nothing like a flag at half-mast, such as on a day of national mourning. Instead, this term refers to the location of the flag – at the mid-point of what would otherwise be a continuous downtrend.

Important Characteristics

Following are important characteristics for this pattern.

 

Trendlines

 

Flags are very similar to Pennants. However, with a Flag, the price trendlines tend to run parallel, whereas with a Pennant, the price trendlines tend to converge. John J. Murphy notes that a price drop below the lower trendline may indicate the resumption of the downtrend.

 

Volume

As the Flag develops, the volume tends to decrease. However, you will often notice a sharp spike in volume at the end of a Flag, whether it is bearish or bullish.

Duration of the Pattern

Martin Pring notes in his book, Technical Analysis Explained that “Flags can form in a period as short as 5 days or as longs as 3 to 5 weeks.” John J. Murphy identifies that Flags “often last no longer than one or two weeks.”

Trading Considerations

 

Possibility of Price Reversal

In some rare cases, the price will break against the original price movement, and create a reversal trend. The pattern reversal may be signaled during the Flag formation by a pattern of increasing volume, as opposed to the more typical decrease.

Duration of the Pattern

The duration of the pattern depends on the extent of the price fluctuations (consolidation). The greater the fluctuations, the longer a pattern will take to develop.

Target Price

It is commonly held that the length of the flagpole indicates the potential price decrease. When the Flag completes, the price typically jumps to replicate the height of the original flagpole, while continuing in the direction of the inbound trend.

 

Criteria that Supports

 

Volume

Volume should diminish noticeably as the pattern forms.

A strong volume spike on the day of the pattern confirmation is a strong indicator in support of the potential for this pattern. The volume spike should be significantly above the average of the volume for the duration of the pattern. In addition, the volume over the course of the pattern should be declining on average.

Criteria that Refutes

Duration of the Pattern

According to Martin Pring, a pattern that exceeds “4 weeks to develop should … be treated with caution”. After 4 weeks, interest in the stock is likely to decrease to point that it is unlikely to continue in a strong downtrend.

 

No Volume Spike on Breakout

The lack of a volume spike on the day of the pattern confirmation is an indication that this pattern may not be reliable. In addition, if the volume has remained constant, or was increasing, over the duration of the pattern, then this pattern should be considered less reliable and may actually reverse.

Long Inbound Trend

Shabacker writes that, “When a mast is long … and it’s Flag relatively small, we should naturally expect the movement to be pretty well exhausted when its indicated objective is reached.” He suggests that when you observe this formation, and a price continuation occurs, it is best to use the flagpole as a “yard-stick” to indicate the level at which to “take profits, step aside, and watch for further chart developments.”

Underlying Behavior

This pattern is effectively a pause in a downtrend. The price has gotten ahead of itself with a steep rise; therefore market activity takes a break before continuing the downtrend. This pause is reflected in the decreasing trading volume. Similarly, a spike in volume marks the resumption of the downtrend.

 

 

 

 

 

 

 

 

 

Head and Shoulders Top

 

Implication

A Head and Shoulders Top is considered a bearish signal. It indicates a possible reversal of the current uptrend to a new downtrend.

Description

The Head and Shoulders Top is an extremely popular pattern among investors because it’s one of the most reliable of all formations. It also appears to be an easy one to spot. Novice investors often make the mistake of seeing Head and Shoulders everywhere. Seasoned technical analysts will tell you that it is tough to spot the real occurrences.

The classic Head and Shoulders Top looks like a human head with shoulders on either side of the head. A perfect example of the pattern has three sharp high points, created by three successive rallies in the price of the financial instrument.

The first point – the left shoulder – occurs as the price of the financial instrument in a rising market hits a high and then falls back. The second point – the head – happens when prices rise to an even higher high and then fall back again. The third point – the right shoulder – occurs when prices rise again but don’t hit the high of the head. Prices then fall back again once they have hit the high of the right shoulder. The shoulders are definitely lower than the head and, in a classic formation, are often roughly equal to one another.

A key element of the pattern is the neckline. The neckline is formed by drawing a line connecting two low price points of the formation. The first low point occurs at the end of the left shoulder and the beginning of the uptrend to the head. The second marks the end of the head and the beginning of the upturn to the right shoulder. The neckline can be horizontal or it can slope up or down. The pattern is complete when the support provided by the neckline is “broken.” This occurs when the price of the financial instrument, falling from the high point of the right shoulder, moves below the neckline. Technical analysts will often say that the pattern is not confirmed until the price closes below the neckline – it is not enough for it to trade below the neckline.

There are many variations, some of which are described here and can be just as valid as the classic formation. Other factors – including volume and the quality of the breakout – should be considered in conjunction with the pattern itself.

Variations of a Head and Shoulders Top

Following are some variations of the Head and Shoulder pattern that may occur.

The Drooping Shoulder

The drooping shoulder, where the neckline has a downward slope, is highly unusual and demonstrates extreme weakness. The droop happens because the price at the end of the head and the beginning of the right shoulder has dropped even lower than the previous low at the end of the left shoulder and the beginning of the head. Most experts agree that a downward slope has bearish implications for market weakness. When the right shoulder is drooping, the trader will have to wait longer than usual for a decisive neck break. It should also be noted that when that decisive break does occur much of the move will have already occurred.

Varying Width of Shoulders

The classic Head and Shoulders Top is symmetrical. However, if the shoulders don’t match in width, don’t discount the pattern.

Flat Shoulders

While the classic Head and Shoulders Top is made up of three sharp upward points, these need not be present for the pattern to be valid. Sometimes, shoulders can be rounded.

Multiple Head and Shoulders Patterns

Many valid Head and Shoulders patterns are not as well defined as the classical head with a shoulder on either side. It is not uncommon to see more than two shoulders and more than one head. A common version of a multiple Head and Shoulders pattern includes two left shoulders of more or less equal size, one head, and then two right shoulders that mimic the size and shape of the left shoulders.

Volume

Volume is extremely important for this pattern.

For a Head and Shoulders Top the volume pattern is as follows.

Volume is highest when the left shoulder is forming. In fact, volume is often expanding as the uptrend continues and more and more buyers want to get in.

Volume is lowest on the right shoulder as investors see a reversal happening. Experts say low volume levels on the right shoulder are a strong sign of a reversal.

In the head portion of the price pattern, volume falls somewhere between the strength of the left shoulder and weakness of the right shoulder. Volume often increases when the neckline is broken as the reversal is now complete and downside pressure begins in earnest. One of the key characteristics looked for in a Head and Shoulders Top by seasoned Technical Analysts is very high volume on the breakout.

Although volume is important, experts warn us not to get caught up in the precise number of shares being traded. What is more important are changes in the rate of trading.

Important Characteristics

Following are important characteristics for this pattern.

 

Symmetry

The right and left shoulders peak at approximately the same price level. In addition, the shoulders are often about the same distance from the head. In other words, there should be about the same amount of time between the development of the top of the left shoulder and the head as between the head and the top of the right shoulder. In the real world, the formation will seldom be perfectly symmetrical. Sometimes one shoulder will be higher than the other or take more time to develop.

Volume

Volume is highest on the left shoulder, lowest on the right shoulder and somewhere in between on the head.

Duration of the Pattern

Some experts say that an average pattern takes at least three months from start to the breakout point when the neckline is broken. It is not uncommon, however, for a pattern to last up to six months. The duration of the pattern is sometimes called the “width” or “length” of the pattern.

Need for an Uptrend

This is a reversal pattern which marks the transition from an uptrend in prices to a downtrend. This means that the pattern always begins during an uptrend of prices.

Slope of the Neckline

The neckline can slope up or down. An upward sloping neckline is considered to be more bullish than a downward sloping one, which indicates a weaker situation with more drastic price declines. It is rather rare to have a downward sloping neckline for this pattern.

Trading Considerations

Duration of the Pattern

Consider the duration of the pattern and its relationship to your trading time horizons. The duration of the pattern is considered to be an indicator of the duration of the influence of this pattern. The longer the pattern the longer it will take for the price to move to the target price. The shorter the pattern the sooner the price move. If you are considering a short-term trading opportunity, look for a pattern with a short duration. If you are considering a longer-term trading opportunity, look for a pattern with a longer duration.

Target Price

The target price provides an important indication about the potential price move that this pattern indicates. Consider whether the target price for this pattern is sufficient to provide adequate returns after your costs (such as commissions) have been taken into account. A good rule of thumb is that the target price must indicate a potential return of greater than 5% before a pattern is considered useful. However you must consider the current price and the volume of shares you intend to trade. Also, check that the target price has not already been achieved.

Inbound Trend

The inbound trend is an important characteristic of the pattern. A shallow inbound trend may indicate a period of consolidation before the price move indicated by the pattern begins. Look for an inbound trend that is longer than the duration of the pattern. A good rule of thumb is that the inbound trend should be at least two times the duration of the pattern.

Criteria that Supports

Support and Resistance

Look for a region of support or resistance around the target price. A region of price consolidation or a strong Support and Resistance Line at or around the target price is a strong indicator that the price will move to that point.

Location of Moving Average

The Head and Shoulders Top should be above the Moving Average. Compare the location of the pattern to a Moving Average of appropriate length. For short duration patterns use a 50 day Moving Average, for longer patterns use a 200 day Moving Average.

Moving Average Trend

The Moving Average should change direction within the duration of the pattern and should head in the direction indicated by the pattern. Look at the direction of the Moving Average Trend. For short duration patterns use a 50 day Moving Average, for longer patterns use a 200 day Moving Average.

Volume

Volume is highest when the left shoulder is forming.

Volume is lowest on the right shoulder.

In the head portion of the price pattern, volume falls somewhere between the strength of the left shoulder and weakness of the right shoulder.

A strong volume spike on the day of the pattern confirmation is a strong indicator in support of the potential for this pattern. The volume spike should be significantly above the average of the volume for the duration of the pattern.

Other Patterns

Other reversal patterns (such as Bullish and Bearish Engulfing Lines and Islands) that occur at the peaks and valleys indicate strong resistance at those points. The presence of these patterns inside a Head and Shoulders is a strong indication in support of this pattern.

Criteria that Refutes

No Volume Spike on Confirmation

The lack of a volume spike on the day of the pattern confirmation is an indication that this pattern may not be reliable. In addition, if the volume has remained constant, or was increasing, over the duration of the pattern, then this pattern should be considered less reliable.

Location of Moving Average

If the Head and Shoulders Top is below the Moving Average then this pattern should be considered less reliable. Compare the location of the pattern to a Moving Average of appropriate length. For short duration patterns use a 50 day Moving Average, for longer patterns use a 200 day Moving Average.

Moving Average Trend

A Moving Average that is trending in the opposite direction to that indicated by the pattern is an indication that this pattern is less reliable. Look at the direction of the Moving Average Trend. For short duration patterns use a 50 day Moving Average, for longer patterns use a 200 day Moving Average.

Inbound Trend

An inbound trend that is significantly shorter than the pattern duration is an indication that this pattern should be considered less reliable.

 

 

Megaphone Top Chart Pattern

 

Reverse Symmetrical Triangle (Megaphone Chart Pattern)

Implication
A Megaphone Top also known as a Broadening Top is considered a bearish signal, indicating that the current uptrend may reverse to form a new downtrend.

Description
A Megaphone Top is a relatively rare formation and is also known as a Broadening Top. Its shape is opposite to that of a Symmetrical Triangle. The pattern develops after a strong advance in a stock price and can last several weeks or even a few months.
A Megaphone Top is formed because the stock makes a series of higher highs and lower lows. The Megaphone Top usually consists of three ascending peaks and two descending troughs. The signal that the pattern is complete occurs when prices fall below the lower low.

 

Volume in the Megaphone Top usually peaks along with prices. It is usual to see trading volumes increase or remain high during the formation of this pattern. The eventual breakout and reversal can be difficult to identify at the time of its occurrence because volume does not appear unusual.

Trading Considerations

Target Price
The target price provides an important indication about the potential price move that this pattern indicates. Consider whether the target price for this pattern is sufficient to provide adequate returns after your costs (such as commissions) have been taken into account. A good rule of thumb is that the target price must indicate a potential return of greater than 5% before a pattern should be considered useful, however you must consider the current price and the volume of shares you intend to trade.

Criteria that Supports

Volume
Volume in the Megaphone Top usually peaks along with prices. A strong volume spike on the day of the pattern confirmation is a strong indicator in support of the potential for this pattern. Underlying Behavior

The creation of the pattern reflects a period of time when bulls and bears are battling to gain control of the stock. The pattern occurs after the bulls have been charging and driving the stock price appreciably higher. During the formation of the Megaphone Top, however, bears are exerting increasing influence on the stock and causing it to set a series of lower lows. The increasing volatility eventually creates a sense of uncertainty, leads to profit-taking, and deters some of the bulls from making any further commitments.

The bears eventually triumph.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bearish Pennant Stock Chart Pattern

 

 

 

 

 

 

Pennant (Bearish) Chart Pattern

Implication
A Pennant (Bearish) is considered a bearish signal, indicating that the current downtrend may continue.

Description
A Pennant (Bearish) follows a steep, or nearly vertical fall in price, and consists of two converging trendlines that form a narrow, tapering flag shape. The Pennant shape generally appears as a horizontal shape, rather than one with a downtrend or uptrend.

Apart from its shape, the Pennant is similar in all respects to the Flag. The Pennant is also similar to the Symmetrical Triangle or Wedge continuation patterns however; the Pennant is typically shorter in duration and flies horizontally.

Criteria that Supports
Volume
Volume should diminish noticeably as the pattern forms.
A strong volume spike on the day of the pattern confirmation is a strong indicator in support of the potential for this pattern. The volume spike should be significantly above the average of the volume for the duration of the pattern. In addition, the volume over the course of the pattern should be declining on average.

Important Characteristics
Following are important characteristics for this pattern.
Trendlines
For Pennants, the price trendlines tend to converge. At the start of the Pennant, the price spikes, perhaps in response to an unexpected and negative company announcement. Following the price spike, the price fluctuations continue until they taper out and become decreasingly less volatile. This behavior appears on a price chart with the initial price spike forming what technical analysts refer to as the “mast” of the Pennant, followed by a triangular pennant shape.
Volume
As the Pennant develops, the volume tends to decrease. Martin Pring notes in his book, Technical Analysis Explained, “a pennant is in effect a very small triangle. If anything, volume tends to contract even more during the formation of a pennant than during that of a flag.” However, as with Flags, when the Pennant completes you will often observe a sharp spike in volume.
Duration of the Pattern
In his book, Technical Analysis of the Financial Markets, John J. Murphy identifies that Pennants and Flags are relatively short-term and should be completed within one to three weeks”. He also notes that by comparison, the bullish patterns take longer to develop than the related bearish patterns.

Trading Considerations
Possibility of Price Reversal
In some rare cases, the price will break against the original price movement, and create a reversal trend. The pattern reversal may be signaled during the Pennant formation by an increase in volume, as opposed to the more typical decrease.

Duration of the Pattern
The duration of the pattern depends on the extent of the price fluctuations (consolidation). The greater the fluctuations, the longer a pattern will take to develop.
Target Price
It is commonly held that the length of the mast indicates the potential price increase. Like the Flag, the Pennant is considered to be a pause in a downtrend. Following the Pennant, the price typically jumps to replicate the height of the mast, while continuing in the direction of the inbound trend.

Criteria that Refutes
Duration of the Pattern
According to Martin Pring, a pattern that exceeds “4 weeks to develop should … be treated with caution”. After 4 weeks, interest in the stock is likely to decrease to point that it is unlikely to continue in a strong downtrend.
No Volume Spike on Breakout
The lack of a volume spike on the day of the pattern confirmation is an indication that this pattern may not be reliable. In addition, if the volume has remained constant, or was increasing, over the duration of the pattern, then this pattern should be considered less reliable and may actually reverse.

Underlying Behavior
This pattern is effectively a pause in a downtrend. The price has moved ahead of itself with a steep rise; therefore market activity takes a break before continuing the downtrend. This pause is reflected in the decreasing trading volume. Similarly, a spike in volume marks the resumption of the downtrend

 

 

 

 

 

 

 

 

Rounded Top Stock Chart Pattern

Rounded Top Chart Pattern

Implication
A Rounded Top is considered a bearish signal, indicating a possible reversal of the current uptrend to a new downtrend.

Description
A Rounded Top is dome-shaped, and is sometimes referred to as an inverted bowl or a saucer top. The pattern is confirmed when the price breaks down below its moving average.

 

Important Characteristics
Following are important characteristic to look for in a Rounded Top.

Shape
Robert D. Edwards and John Magee describe the rounded top as being a “gradual, progressive, and fairly symmetrical change in the trend direction, produced by a gradual shift in the balance between buying and selling”. For a rounded top, the price can fluctuate or be linear. However, the overall curve should be smooth and regular, without obvious spikes. Volume
Volume can fluctuate, however volume generally appears to be concave, and follows the inverse of the price pattern. Therefore, as the price begins to ascend, volume tends to decrease. Once the top of the price pattern starts its downward turn, volume tends to increase.

As Martin J. Pring writes in his book, Technical Analysis Explained, “The tip-off to the bearish implication of the rounded top is the fact that volume shrinks as prices reach their highest levels and then expand as they fall.”

Duration of the Rounded Top
Rounded Tops typically occur over a period of about 3 weeks, but can also be observed over several years.

Trading Considerations

Duration of the Pattern
The duration of the pattern indicates the significance of the price movement. Clifford Pistolese writes, “a rounding top that is completed in a couple of months will usually be less significant than one that takes a much longer time to complete.”

Target Price
After a downside breakout, technical analysts may use the starting price at the left side of the dome to determine where the price may head. However, you will want to monitor the stock with interest. Price may end higher than it was at the beginning of the pattern. Furthermore, there is the potential for the price to rise after the rounded top completes. Thomas N. Bulkowski writes that, “most of the time prices rise after a rounding top completes”.

Criteria that Supports

Volume
Volume should diminish as the pattern forms.

Moving Average
Moving averages help to determine whether the rounded top has the potential to descend. For a rounded top, the price should cross below the moving average when it begins to descend. When this crossover occurs, the pattern is “confirmed”.

There is an abundance of literature about moving averages if you are interested in understanding how they operate. In simple terms, the moving average can be used to detect a possible pattern success or failure. Typically, a moving average represents the closing price of a stock over a set number of days, and can be used to anticipate the general direction of a stock. Depending on the type of stock, investors may decide to use a long, medium or short term moving average. For example, short duration patterns generally use a 50-day moving average, and longer patterns generally use a 200-day moving average.

Trendlines

Price trendlines provide investors with a way to monitor and validate a rounded top. To track a potential rounded top, technical analysts draw a line just beneath the lower limits of the price uptrend. The trendline is straight, regardless of the fluctuations of the price. When the price drops beneath the line, there is indication that the uptrend has ended.

When the downtrend begins, technical analysts draw another line just above the upper limits of the price pattern, and continue down towards the start price of the pattern formation. When the price rises above the line, there is an indication that the new downtrend has ended.

Criteria that Refutes

Upside Breakouts
A promising-looking rounded shape with an breakout above the moving average, instead of below, may not establish or maintain a new downtrend.

Underlying Behavior

A Rounded Top forms as investor sentiment shifts gradually from bullishness to bearishness. As the sentiment turns up toward the top, there is a drop off in trading volume due to the indecisiveness in the market. There is a period of consolidation at the top as trading bounces within a certain range, then finally there is a gradual downturn marking the shift to bearishness. As investors become more decisive about the bearishness, there is an increase in

 

 

 

Symmetrical Continuation Triangle (Bearish)

Implication

A Symmetrical Continuation Triangle (Bearish) is considered a bearish signal, indicating that the current downtrend may continue.

Description

A Symmetrical Continuation Triangle (Bearish) shows two converging trendlines, the lower one is ascending, the upper one is descending. The formation occurs because prices are reaching both lower highs and higher lows. The pattern will display two highs touching the upper (descending) trendline and two lows touching the lower (ascending) trendline.

This pattern is confirmed when the price breaks out of the triangle formation to close below the lower (ascending) trendline.

Volume is an important factor to consider. Typically, volume follows a reliable pattern: volume should diminish as the price swings back and forth between an increasingly narrow range of highs and lows. However, when the breakout occurs, there should be a noticeable increase in volume. If this volume picture is not clear, investors should be cautious about decisions based on this triangle.

Important Characteristics

Following are important characteristics for this pattern.

Occurrence of a Breakout

Technical analysts pay close attention to how long the Triangle takes to develop to its apex. The general rule is that prices should break out – clearly penetrate the lower trendline – somewhere between three-quarters and two-thirds of the horizontal width of the formation. The break out, in other words, should occur well before the pattern reaches the apex of the Triangle. The closer the breakout occurs to the apex the less reliable the formation.

Duration of the Triangle

The Triangle is a relatively short-term pattern. While long-term triangles do form, the most reliable triangles take between one and three months to form.

Volume

Investors should see volume decreasing as the pattern progresses toward the apex of the Triangle. At breakout, however, there should be a noticeable increase in volume.

 

Trading Considerations

Duration of the Pattern

Consider the duration of the pattern and its relationship to your trading time horizons. The duration of the pattern is considered to be an indicator of the duration of the influence of this pattern. The longer the pattern the longer it will take for the price to reach its target. The shorter the pattern the sooner the price move. If you are considering a short-term trading opportunity, look for a pattern with a short duration. If you are considering a longer-term trading opportunity, look for a pattern with a longer duration.

Target Price

The target price provides an important indication about the potential price move that this pattern indicates. Consider whether the target price for this pattern is sufficient to provide adequate returns after your costs (such as commissions) have been taken into account. A good rule of thumb is that the target price must indicate a potential return of greater than 5% before a pattern should be considered useful. However you must consider the current price and the volume of shares you intend to trade. Also, check that the target price has not already been achieved.

Inbound Trend

The inbound trend is an important characteristic of the pattern. A shallow inbound trend may indicate a period of consolidation before the price move indicated by the pattern begins. Look for an inbound trend that is longer than the duration of the pattern. A good rule of thumb is that the inbound trend should be at least two times the duration of the pattern.

Confirm the Breakout

To avoid taking an inadvisable position in a stock, some investors advise waiting a few days to determine whether the breakout signals that the price is ready to move. A key sign of a possible false move is low volume. If there’s no pick up in volume around the breakout, investors should be wary. Typically, a good breakout from a Triangle formation will be accompanied by a definite surge in volume.

 

Criteria that Supports

Support and Resistance

Look for a region of support or resistance around the target price. A region of price consolidation or a strong Support and Resistance Line at or around the target price is a strong indicator that the price will move to that point.

 

Moving Average

Watch for the 200 day moving average to flatten. When prices cross below the 200 day moving average (usually about two-thirds to three-quarters of the way through the pattern), the pattern is considered more reliable.

Volume

A strong volume spike on the day of the pattern confirmation is a strong indicator in support of the potential for this pattern. The volume spike should be significantly above the average of the volume for the duration of the pattern. In addition, the volume during the duration of the pattern should be declining on average.

Criteria that Refutes

No Volume Spike on Breakout

The lack of a volume spike on the day of the pattern confirmation is an indication that this pattern may not be reliable. In addition, if the volume has remained constant, or was increasing, over the duration of the pattern, then this pattern should be considered less reliable.

Short Inbound Trend

An inbound trend that is significantly shorter than the pattern duration is an indication that this pattern should be considered less reliable.

Underlying Behavior

This pattern is a result of converging trendlines of support and resistance which give this Triangle pattern its distinctive shape. This occurs because the trading action gets tighter and tighter until the market breaks out with great force. Buyers and sellers find themselves in a period where they are not sure where the market is headed. Their uncertainty is marked by their actions of buying and selling sooner, making the range of the price movements increasingly tight. As the range between the peaks and troughs marking the progression of price narrows, the trendlines meet at the “apex,” located at the right of the chart.

The narrowing of the trading action and the decreasing volume of trade reflect the indecision in the market. Finally consensus or decision in the market is reached and this is reflected as the price breaks out of the triangle. A spike in volume on this breakout date reflects stronger consensus that the stock should move in that direction.

 

 

 

 

 

 

 

Top Triangle Chart Pattern

 

Implication

A Top Triangle/Wedge is considered a bearish signal, indicating a possible reversal of the current uptrend to a new downtrend.

Description

A Top Triangle/Wedge consists of a group of patterns which have the same general shape as Symmetrical Triangles, Wedges, Ascending Triangles and Descending Triangles. The difference is that the formations grouped together as this pattern are reversal and not continuation patterns. These patterns have two converging trendlines. The pattern will display two highs touching the upper trendline and two lows touching the lower trendline.

 

This pattern is confirmed when the price breaks downward out of the Triangle/Wedge formation to close below the lower trendline.

Volume is an important factor to consider. Typically, volume follows a reliable pattern: volume should diminish as the price swings back and forth between an increasingly narrow range of highs and lows. However, when the breakout occurs, there should be a noticeable increase in volume. If this volume picture is not clear, investors should be cautious about decisions based on this Triangle/Wedge.

Important Characteristics

Following are important characteristics for this pattern.

Occurrence of a Breakout

Technical analysts pay close attention to how long the pattern takes to develop to its apex. The general rule is that prices should break out – clearly penetrate the lower trendline – somewhere between three-quarters and two-thirds of the horizontal width of the formation. The break out, in other words, should occur well before the pattern reaches the apex of the Triangle/Wedge. The closer the breakout occurs to the apex the less reliable the formation.

 

Duration of the Triangle/Wedge

This pattern is a relatively short-term. While long-term Triangles/Wedges do form, the most reliable patterns take between one and three months to form.

Volume

Investors should see volume decreasing as the pattern progresses toward the apex of the Triangle/Wedge. At breakout, however, there should be a noticeable increase in volume.

 

Trading Considerations

Duration of the Pattern

Consider the duration of the pattern and its relationship to your trading time horizons. The duration of the pattern is considered to be an indicator of the duration of the influence of this pattern. The longer the pattern the longer it will take for the price to reach its target. The shorter the pattern the sooner the price move. If you are considering a short-term trading opportunity, look for a pattern with a short duration. If you are considering a longer-term trading opportunity, look for a pattern with a longer duration.

Target Price

The target price provides an important indication about the potential price move that this pattern indicates. Consider whether the target price for this pattern is sufficient to provide adequate returns after your costs (such as commissions) have been taken into account. A good rule of thumb is that the target price must indicate a potential return of greater than 5% before a pattern should be considered useful. However you must consider the current price and the volume of shares you intend to trade. Also, check that the target price has not already been achieved.

Inbound Trend

The inbound trend is an important characteristic of the pattern. A shallow inbound trend may indicate a period of consolidation before the price move indicated by the pattern begins. Look for an inbound trend that is longer than the duration of the pattern. A good rule of thumb is that the inbound trend should be at least two times the duration of the pattern.

 

Criteria that Supports

Support and Resistance

Look for a region of support or resistance around the target price. A region of price consolidation or a strong Support and Resistance Line at or around the target price is a strong indicator that the price will move to that point.

Moving Average

Watch for the 200 day moving average to flatten. When prices cross below the 200 day moving average (usually about two-thirds to three-quarters of the way through the pattern), the pattern is considered more reliable.

 

Volume

A strong volume spike on the day of the pattern confirmation is a strong indicator in support of the potential for this pattern. The volume spike should be significantly above the average of the volume for the duration of the pattern. In addition, the volume during the duration of the pattern should be declining on average.

Criteria that Refutes

No Volume Spike on Breakout

The lack of a volume spike on the day of the pattern confirmation is an indication that this pattern may not be reliable. In addition, if the volume has remained constant, or was increasing, over the duration of the pattern, then this pattern should be considered less reliable.

Short Inbound Trend

An inbound trend that is significantly shorter than the pattern duration is an indication that this pattern should be considered less reliable.

Underlying Behavior

This pattern is a result of converging trendlines of support and resistance which give this pattern its distinctive shape. This occurs because the trading action gets tighter and tighter until the market breaks out with great force. Buyers and sellers find themselves in a period where they are not sure where the market is headed. Their uncertainty is marked by their actions of buying and selling sooner, making the range of the price movements increasingly tight. As the range between the peaks and troughs marking the progression of price narrows, the trendlines meet at the “apex,”.

The narrowing of the trading action and the decreasing volume of trade reflect the indecision in the market. Finally consensus or decision in the market is reached and this is reflected as the price breaks out of the Triangle/Wedge. A spike in volume on this breakout date reflects stronger consensus that the stock should move in that direction.

 

 

 

 

 

 

 

 

Triple Top Chart Pattern

Triple Top Chart Pattern

Introduction

A triple top is considered to be a variation of the head and shoulders top. Often the only thing that differentiates a triple top from a head and shoulders top is the fact that the three peaks that make up the triple top are more or less at the same level. The head and shoulders top displays a higher peak – the “head” – between the two shoulders.

According to experts including Murphy, making a distinction between these two patterns is largely academic because they both imply the same thing.They are both “reversal” patterns of an upward trend in a stock. The triple top marks an uptrend in the process of becoming a downtrend.

What does a triple top look like?

As shown below, the triple top pattern is comprised of three sharp peaks, all at the same level. A triple top occurs when prices are in an uptrend. Prices rise to a resistance level, retreat, return to the resistance level again, retreat, and finally, return to that resistance level for a third time before declining. In a classic triple top, the decline following the third peak marks the beginning of a downtrend.

While the three peaks should be sharp and distinct, the lows of the pattern can appear as rounded valleys. The pattern is complete when prices decline below the lowest low in the formation. The lowest low is also called the “confirmation point.”
Bulkowski advises that this pattern can have many variations. He continues, however, to advise that an investor should ensure that the three peaks are well separated and not part of a congestion pattern. “Each top should be part of its own minor high, a distinct peak that towers about the surrounding price landscape.”
Elaine Yager, Director of Technical Analysis at Investec Ernst and Company in New York and a member of Recognia’s Board of Advisors suggests they should be noticeably distinct peaks and they do not have to be precisely at the same level.

 

Why is this pattern important?

Like the head and shoulders top which it resembles so closely, the triple top is considered by experts to be a reliable pattern. According to Schabacker, there is a good explanation for placing reliance on this pattern. The pattern illustrates three successive attempts to break through a resistance level. Price cannot move above a certain point, despite three tries. “Each failure adds weight to the indications of reversal,” explains Schabacker.

Is volume important in a triple top?
Generally, volume in a triple top tends to be downward as the pattern forms. Murphy advises that volume should be lighter on each rally peak.Volume then picks up as prices fall under the confirmation point and break into the new downward trend.

Both Bulkowski and Schabacker place less significance on the downward progression of volume. While both agree that investors should see relatively high volume on the first peak, they also agree that volume on the other peaks can be confused and irregular. Volume should be higher on the peaks than at the lows. Bulkowski’s statistics suggest that an investor should see a volume burst at the time of breakout and during the few days following the decline in price below the confirmation point.

What are the details that I should pay attention to in the triple top?

1. Duration of the Pattern

This pattern can take upwards of several months to form. According to Bulkowski, average formation time is approximately four months. In addition, experts, including Schabacker and Murphy, agree that the longer the pattern takes to form, the greater the significance of the price move once breakout occurs. The three highs do not need to be equally spaced from one another.

2. Need for an Uptrend

The triple top is a reversal pattern marking the transition period between an uptrend and a downtrend in prices. It is crucial to the existence of this pattern that it begin with an uptrend of stock prices.

3. Decisive Breakout

Investors are advised to wait for prices to make a definitive break below the confirmation point of a triple top pattern. If prices do not fall below the confirmation point after the third peak is reached, the pattern is not a triple top. In a bull market, for example, it is common to see three highs which look like the beginning of a well-formed triple top. If prices, however, do not fall below the confirmation point, they can just as easily pull away from the highs established by the three peaks and then continue on in the upward trend.

4. Volume

As discussed, it is typical to see volume diminish as the pattern progresses. This should change, however, when breakout occurs. A valid breakout should be accompanied by a burst in volume. Certain experts are less concerned by seeing a steadily diminishing trend in volume as the pattern progresses through its three highs. Schabacker comments that the volume picture can often be confused and irregular.7 All agree, however, that an investor will want to see a definite increase in volume at the time of the break through the confirmation point.

5. Rally after Breakout
Yager notes that a high percentage of triple tops have rallies back to the point of the breakdown more often than not.

How can I trade this pattern?

Begin by calculating the target price – the minimum expected price move. The triple top is measured in a way similar to that for the head and shoulders top.

Calculate the height of the pattern by subtracting the lowest low from the highest high in the formation. Then, subtract the height from the lowest low. In other words, an investor can expect the price to move downwards at least the distance from the breakout point less the height of the pattern.

For example, assume the lowest low of the triple top is 170 and the highest high is 220. The height of the pattern equals 50 (220 – 170 = 50). The minimum target price is 120 (170 – 50 = 120).

Bulkowski calculates that the measure rule is not completely reliable for the triple top, estimating that nearly 50% of all triple tops will fall short of their minimum target price.

Edwards and Magee warn that true triple tops are few and far between. So, it makes sense to be cautious when assessing what might initially look like a developing triple top.

According to Edwards and Magee, an investor should never “jump the gun” with a triple top.If the triple top is not completed by breaking through the confirmation point, experts advise caution. The pattern can fail to complete and just as easily recommence an upwards trend. However, Edwards and Magee also explain that if the pattern has been confirmed by a valid breakout, then the pattern seldom fails. “Stick to the breakout rule,” they advise, “and you will be safe.”

Rallies are common with triple tops. An investor can trade that return move to his or her advantage. According to Bulkowski, if an investor misses the breakout, there’s still time to place or add to a short position when prices resume their rally towards the former breakdown level. In this case it would have been 170.

Are there variations in the pattern that I should know about?

1. Hybrid Variation
There is a hybrid variation that appears to be a cross between a double and triple top. The middle peak is slightly lower than the left and right peaks. This is still a valid reversal pattern.

2. Fourth Peak
It is possible for the pattern to display a fourth peak before reversal occurs.

CHART EXAMPLE

CHART EXAMPLE

Candle Pattern Exhaustion Bar (Bullish)

Exhaustion Bar (Bullish) Short-term Pattern

Implication

An Exhaustion Bar (Bullish) indicates a possible reversal of the current downtrend to a new uptrend. This pattern is an indication of a financial instrument’s SHORT-TERM outlook. One and two-bar patterns reflect changes in investor psychology that have a very short-term influence on future prices – typically less than 10 bars. Often the immediate effect is trend exhaustion followed by reversal. For traders looking for clear entry and exit points, these patterns serve well. They are normally not suitable as signals for long-term investors unless viewed as monthly bars.

Description

Exhaustion Bars can develop after a rapid up or down move. They are a form of key reversal, but differ sufficiently enough to warrant their own category.

Trading Considerations

Exhaustion Bars can be either Bullish or Bearish depending on the direction of the inbound trend. If the inbound price trend is up, then upon identification of an Exhaustion Bar, taking a short position or selling a long position is recommended. Conversely, if the inbound price trend is down as in this case, then upon identification of an Exhaustion Bar, taking a long position or closing a short position is recommended.

Failure of this pattern is denoted by a price move in the wrong direction beyond the extreme point of the Exhaustion Bar.

The degree that the price bars and volume characteristics match this description will likely have a bearing on the strength of the post pattern price movement. Good trading practice dictates that these signals should not be used in isolation: fundamental data, sector and market indications and other technical’s such as support/resistance and momentum studies should be used to support your trading decisions.

Criteria that Supports

The price opens with a large gap in the direction of the then-prevailing trend.

The bar is extremely wide relative to the previous bars.

The opening price develops in the lower half of the bar in a downtrend and in the upper half in an uptrend.

The closing price should be both above the opening price and in the top half of the bar in a downtrend and in the lower half and below the opening in an uptrend.

The bar is completed with a gap to the left still in place.

Look for heavy volume to indicate temporary inbound trend climax.

Underlying Behavior

The presence of an Exhaustion Bar usually warns of a reversal of psychology. With a large opening gap, we are seeing the results of extreme sentiment, but as the wide trading range eats up a large part of the opening gap, and the bar ends with the gap almost closed, we have a strong indication of a sentiment reversal from bearish to bullish.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inside Bar Bullish Stock Chart Pattern

Inside Bar (Bullish) Short-term Pattern

Implication

An Inside Bar (Bullish) indicates a possible reversal of the current downtrend to a new uptrend. This pattern is an indication of a financial instrument’s SHORT-TERM outlook. Two-bar patterns reflect changes in investor psychology that have a very short-term influence on future prices – typically less than 10 bars. Often the immediate effect is trend exhaustion and potentially, a reversal. For traders looking for clear entry and exit points, these patterns serve well. They are normally not suitable as signals for long-term investors unless viewed as monthly bars.

Description

An Inside Bar is a reversal formation characterized by a bar that forms totally within the trading range of the preceding bar. Inside Bars reflect a balance between buyers and sellers following a sharp up or down move, which is sometimes later resolved by a change in trend.

Trading Considerations

Inside Bars can be either Bullish or Bearish depending on the direction of the inbound trend. If the inbound price trend is up, then upon identification of an Inside Bar, taking a short position or selling a long position is recommended. Conversely, if the inbound price trend is down, then upon identification of an Inside Bar, taking a long position or closing a short position is recommended. Look for confirmation in a trend-line break.

The degree that the price bars and volume characteristics match this description will likely have a bearing on the strength of the post pattern price movement. Good trading practice dictates that these signals should not be used in isolation: fundamental data, sector and market indications and other technicals such as support/resistance and momentum studies should be used to support your trading decisions.

Criteria that Supports

The sharper the trend preceding the pattern, the better.

The wider the first bar and its immediate predecessors in relation to previous bars, the better. This is evidence that the strong underlying momentum of the prevailing trend has climaxed and will dissipate.

The smaller the second bar relative to the broader range of the first bar, the more dramatic the change in the buyer/seller balance and therefore the stronger the signal.

Volume on the inside bar should be noticeably smaller than that of the preceding bar since it indicates a more balanced situation.

Underlying Behavior

An Inside Bar indicates a balancing of sentiment between buyers and sellers after a sustained up or down move. On the Inside Bar’s second day, especially with a drop in volume, we are seeing a drop off of interest in this instrument. This balancing usually leads to a period of sideways price movement, but a reversal is possible.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key Reversal Bar Bullish Chart Pattern

Implication

A Key Reversal Bar (Bullish) indicates a possible reversal of the current downtrend to a new uptrend. This pattern is an indication of a financial instrument’s SHORT-TERM outlook. One and two-bar patterns reflect changes in investor psychology that have a very short-term influence on future prices – typically less than 10 bars. Often the immediate effect is trend exhaustion, followed by a reversal. For traders looking for clear entry and exit points, these patterns serve well. They are normally not suitable as signals for long-term investors unless viewed as monthly bars.

Description

A Key Reversal Bar is one that develops after a prolonged rally or reaction. Often the trend will be accelerating by the time the price experiences the Key Reversal Bar.

 

 

Trading Considerations

Key Reversal Bars can be either Bullish or Bearish depending on the direction of the inbound trend. If the inbound price trend is up, then upon identification of a Key Reversal Bar, taking a short position or selling a long position is recommended. Conversely, if the inbound price trend is down, then upon identification of a Key Reversal Bar, taking a long position or closing a short position is recommended.

Failure of this pattern is denoted by a price move in the wrong direction beyond the extreme point of the Key Reversal Bar.

 

The degree that the price bars and volume characteristics match this description will likely have a bearing on the strength of the post pattern price movement. Good trading practice dictates that these signals should not be used in isolation: fundamental data, sector and market indications and other technicals such as support/resistance and momentum studies should be used to support your trading decisions.

Criteria that Supports

The price opens strongly in the direction of the prevailing trend.

The trading range is very wide relative to the preceding bars.

The price closes near or below the previous close (or near or above the previous close in a downtrend reversal).

Volume if available, should be climactic on the Key Reversal Bar, and should expand during the inbound trend.

Underlying Behavior

The presence of a Key Reversal Bar usually signals a reversal of psychology and a subsequent retracement of recent gains. With a large opening gap on continued volume expansion, we are seeing the results of climactic sentiment growth, but as the bar’s wide trading range eats up a large part, or the entire opening gap, we have a very strong indication of sentiment reversal.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Two Bar Reversal (Bullish) Chart Pattern

Implication

A Two Bar Reversal (Bullish) indicates a possible reversal of the current downtrend to a new uptrend. This pattern is an indication of a financial instrument’s SHORT-TERM outlook. One and two-bar patterns reflect changes in investor psychology that have a very short-term influence on future prices – typically less than 10 bars. Often the immediate effect is trend reversal. For traders looking for clear entry and exit points, these patterns serve well. They are normally not suitable as signals for long-term investors unless viewed as monthly bars.

Description

A Two Bar Reversal is a classic signal of trend exhaustion. When these patterns occur after a pronounced advance or decline, the first bar should exhibit a dramatic continuation of the inbound trend, closing close to the bar’s extreme end. The second bar completely negates the first bar, with the open price on the second bar being close to the close of the first bar and the close of the second bar being close to the open of the first bar. Wider trading ranges on both bars denote a more climactic reversal in psychology.

 

Trading Considerations

Two Bar Reversals can be either Bullish or Bearish depending on the direction of the inbound price trend. If the inbound trend is up, then upon identification of a Two Bar Reversal, taking a short position or selling a long position is recommended. Conversely, if the inbound price trend is down, then upon identification of a Two Bar Reversal, taking a long position or closing a short position is recommended.

The degree that the price bars and volume characteristics match this description will likely have a bearing on the strength of the post pattern price movement. Good trading practice dictates that these signals should not be used in isolation: fundamental data, sector and market indications and other technicals such as support/resistance and momentum studies should be used to support your trading decisions.

Criteria that Supports

A persistent downward inbound trend is required; the longer and sharper, the better.

Both bars should have exceptionally wide trading ranges relative to the previous bars formed during the inbound trend.

For both bars, the opening and closing prices should be as close to the extreme points of the bars as possible.

Volume, if available, should be higher on both bars to accentuate the sentiment reversal. The greater the expansion of volume, the better the signal.

Underlying Behavior

Two Bar Reversals signal the dashing of hopes for those traders and investors that had been riding the trend or had jumped on board the especially wide trading of the pattern’s first bar. The second bar, by completely reversing the ground made on the first bar, turns the tide of inbound sentiment and replaces it with an equal and opposite sentiment view. Look for an outbound trend period that reverses any gains made in the lead up to the Two Bar Reversal.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Engulfing Line Bullish Short Term Pattern

Engulfing Line (Bullish) Short-term Pattern

Implication

An Engulfing Line (Bullish) indicates a possible reversal of the current downtrend. This pattern is an indication of a financial instrument’s SHORT-TERM outlook.

Description

The Engulfing Line (Bullish) occurs when the Real Body for a price bar is larger than the Real body for the previous price bar. In addition, for an Engulfing Line (Bullish), the Real Body of the previous session must be Black (close lower than open) and the Real Body of the second session must be White (close higher than open).

Criteria that Supports
The difference in the sizes of the two Real Bodies can be an important indicator of the signifiance of the Engulfing Line. If the Real Body of the previous session is substantially smaller than the Real Body of the following session then this pattern should be considered more significant. The greater the size difference the more significant the formation.
The longer and higher the inbound trend that leads into the Engulfing Line, the more significant the pattern. Look for heavy volume in the following session. A noticable increase in volume from the previous few sessions is a strong indication that this pattern is more significant.
If the following session “engulfs” more than one session’s Real Bodies this pattern is very significant.

 

Island Reversal Bullish Chart Pattern

Implication -An Island Bottom is a bullish signal indicating a possible reversal of the current downtrend to a new uptrend. This pattern is an indication of a financial instrument’s SHORT-TERM outlook.

Description-The Island Bottom occurs when the price “gaps” below a specific price range for a number of days and then is confirmed when the price “gaps” above the original range.

Island Top Short-term Pattern

Implication-An Island Top is a bearish signal indicating a possible reversal of the current uptrend to a new downtrend. This pattern is an indication of a financial instrument’s SHORT-TERM outlook.

Description-The Island Top occurs when the price “gaps” above a specific price range for a number of days and then is confirmed when the price “gaps” down below to the original range.

 

Statistics–Bottoms

Percent of successful formations – 85% Average rise of successful formations – 34% Likely decline – 20% Failure rate – 17% Average time to throwback completion – 9 days

Statistics–Tops

Percent of successful formations – 77% Average decline of successful formations – 21% Likely decline – 10% Failure rate – 13% Average time to throwback completion –8 days

CHART EXAMPLE

Outside Bearish Reversal Chart Pattern

Outside Bearish Reversal

Implication

An Engulfing Line (Bearish) indicates a possible end to the current uptrend to a new downtrend. This pattern is an indication of a financial instrument’s SHORT-TERM outlook.

Description

The Engulfing Line (Bearish) occurs when the Real Body for a price bar is larger than the Real Body for the previous price bar. In addition, for an Engulfing Line (Bearish), the Real Body of the previous session must be White (close higher than open) and the Real Body of the second session must be Black (close lower than open).

Criteria that Supports
The difference in the sizes of the two Real Bodies can be an important indicator of the signifiance of the Engulfing Line. If the Real Body of the previous session is substantially smaller than the Real Body of the following session then this pattern should be considered more significant. The greater the size differeence the more significant the formation.
The longer and higher the inbound trend that leads into the Engulfing Line, the more significant the pattern.
Look for heavy volume on the following session. A noticable increase in volume from the previous few sessions is a strong indication that this pattern is more significant.
If the following session “engulfs” more than one session’s Real Bodies this pattern is very significant.

Gap Down Chart Pattern

Implication

Gaps usually represent important areas of support or resistance. A Gap Down will indicate different situations based on the context in which it was formed. A Gap Down in a downtrend may indicate a previous level of support has been broken and now forms a resistance level. A Gap Down in an uptrend may indicate an end to, or a reversal of, the prior uptrend. Gaps provide an indication of a financial instrument’s SHORT-TERM outlook.

Description

A Gap Down forms when the high for a period (usually a day) is lower than the previous period’s low.

Trading Considerations

Since Gaps represent important areas of support or resistance they can be used to measure the strength of moves. If a price breaks through a Gap it is usually a signal of a significant price move.

Criteria that Supports

Three Gap Downs within a trend indicate a possible end to, or reversal of, that trend. The three Gaps do not have to occur on sequential days, but may form many days apart.

 

Gap Up Chart Pattern

Implication

Gaps usually represent important areas of support or resistance. A Gap Up will indicate different situations based on the context in which it was formed. A Gap Up in an uptrend may indicate a previous level of resistance has been broken and now forms a support level. A Gap Up in a downtrend may indicate an end to, or a reversal of, the prior downtrend. Gaps provide an indication of a financial instrument’s SHORT-TERM outlook.

Description

A Gap Up forms when the low for a period (usually day) is higher than the previous period’s high.

Trading Considerations

Since Gaps represent important areas of support or resistance they can be used to measure the strength of moves. If a price breaks through a Gap it is usually a signal of a significant price move.

Criteria that Supports

Three Gap Ups within a trend indicate a possible end to, or reversal of, that trend. The three Gaps do not have to occur on sequential days, but may form many days apart.

 

Gravestone Chart Pattern

Implication

The Gravestone indicates that the prior trend is about to end and may reverse or move sideways. The Gravestone is mostly seen as a top pattern indicating the end of an uptrend. This pattern is an indication of a financial instrument’s SHORT-TERM outlook.

Description

The Gravestone consists of a long Upper Shadow and no Real Body (that is the open is equal to the close for the session). There should be no Lower Shadow for a Gravestone.

Trading Considerations

A small Lower Shadow is acceptable.

A small Real Body is acceptable.

 

Criteria that Supports

The longer the Upper Shadow the more significant the pattern.

 

Criteria that Refutes

If a Lower Shadow exists and is too long then it will reduce the significance of this pattern.

If a Real Body exists and is too large then it will reduce the significance of this pattern.

Candle Stock Pattern Hammer

Implication

The Hammer indicates that the prior downtrend is about to end and may reverse to an uptrend or move sideways. This pattern is an indication of a financial instrument’s SHORT-TERM outlook.

Description

The Hammer is characterized by a small Real Body near the top of the price range. The Real Body can be black or white, although a white candlestick is preferable. A white candlestick is slightly more bullish since it shows that the market sold off sharply during the session and then rebounded to close slightly above the opening price level. The Hammer has a long Lower Shadow and an Upper Shadow that is very small or non-existent.

Trading Considerations

In cases where a major uptrend followed by a Hammer exists, the investor should consider vacating short positions.

Criteria that Supports

A Hammer can be confirmed by a bullish gap between the Real Body of the Hammer and the open on the next session. In other words, the investor should look for the next session opening higher than the Real Body of the Hammer. The greater the gap, the stronger the signal.

The Hammer may be stronger if the subsequent session shows a white Real Body with a close higher than the close of the Hammer.

A Hammer is more significant if it is followed in the next session by another Hammer with superior characteristics.

Patterns with longer Lower Shadows have greater significance.

The smaller the Real Body and the Upper Shadow the greater the significance of the pattern.

Criteria that Refutes

It is important to view signals in the context of prior price action. If the downtrend is strong and there are major bearish indicators before the Hammer, then the Hammer may not work. In this instance, it may be better to wait for bullish confirmation before acting.

The downtrend may still be in force if the next session opens lower than the Real Body of the Hammer.

A Hammer with a black Real Body (where the open is higher than the close) may indicate weakness in the pattern.

Underlying Behavior

A long Lower Shadow and the positioning of the Real Body near the top of the range are both indications that the bears could not maintain new lows. This creates the bullish situation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hanging Man Stock Chart Pattern

Implication

The Hanging Man is a bearish signal indicating that the prior uptrend is about to end and may reverse to a downtrend or move sideways. This pattern is an indication of a financial instrument’s SHORT-TERM outlook.

Description

The name “Hanging Man” is used because it has a gloomy connotation, and also because the candlestick that defines this pattern looks like a hanging man with dangling legs. The Hanging Man pattern is characterized by a small Real Body near the top of the price range. The Real Body can be black or white, although a black candlestick is preferable. A black candlestick is slightly more bearish since it shows that the close could not get back up to the opening price level. The Hanging Man has a long lower shadow that should be at least twice the length of the Real Body. The upper shadow should be very small or non-existant.

Trading Considerations

In cases where a major uptrend exists followed by a Hanging Man, the investor should consider vacating long positions.

Criteria that Supports

A Hanging Man can be confirmed by a bearish gap between the Real Body of the Hanging Man and the open on the next session. In other words, the investor should look for the next session opening lower than the Real Body of the Hanging Man. The greater the gap, the stronger the signal.

A Hanging Man may be a stronger signal if the subsequent session shows a black Real Body with a close lower than the close of the Hanging Man.

A Hanging Man may be a stronger signal if it is followed by another, well-formed Hanging Man in the next session.

The longer the Lower Shadow of the Hanging Man the greater the significance of the pattern.

The smaller the Real Body and the Upper Shadow the more significant the pattern.

Criteria that Refutes

It is important to view signals in the context of prior price action. If the uptrend is strong and there are major bullish indicators before the Hanging Man, then perhaps the bullish momentum is overwhelming and the Hanging Man won’t work. In such cases it is wise to wait for bearish confirmation before acting.

The uptrend may still be in force if the next session opens higher than the Real Body of the Hanging Man.

A Hanging Man with a white Real Body (where the close is higher than the open) may indicate weakness in the pattern.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inverted Hammer Stock chart Pattern

Implication

An Inverted Hammer indicates that the prior downtrend is about to end and may reverse to an uptrend or move sideways. This pattern is an indication of a financial instrument’s SHORT-TERM outlook.

Description

An Inverted Hammer forms when the Upper Shadow is longer than the Real Body and the Lower Shadow is small or non-existant. The Inverted Hammer is the same as an Shooting Star, only the Inverted Hammer appears at the end of an downtrend, whereas the Shooting Star appears at the end of an uptrend.

Criteria that Supports

The Real Body of the Inverted Hammer should “gap” away from the Real Body of the previous session. The greater the size of that gap the more important the Inverted Hammer. Measure the gap between the Real Bodies by taking the higher of the open or the close for the Inverted Hammer and comparing it to the lower of the open or close for the previous session. If the Inverted Hammer’s higher value is less than the previous session’s lower value then a gap is present.

The Lower Shadow of the Inverted Hammer should be almost non-existant.

The Upper Shadow of the Inverted Hammer should be as large as possible. The larger the Upper Shadow, the more important the Inverted Hammer.

 

Shooting Star Candle Stick Pattern

Implication

A Shooting Star indicates that the prior uptrend is about to end and may reverse to a downtrend or move sideways. This pattern is an indication of a financial instrument’s SHORT-TERM outlook.

Description

A Shooting Star forms when the Upper Shadow is longer than the Real Body and the Lower Shadow is small or non-existant. The Shooting Star is the same as an Inverted Hammer, only the Shooting Star appears at the end of an uptrend, whereas the Inverted Hammer appears at the end of a downtrend.

Criteria that Supports

 

The Real Body of the Shooting Star should “gap” away from the Real Body of the previous period. The greater the size of that gap the more important the Shooting Star. Measure the gap between the Real Bodies by taking the lower of the open or the close for the Shooting Star and comparing it to the higher of the open or close for the previous period. If the Shooting Star’s lower value is greater than the previous period’s higher value then a gap is present.

The Lower Shadow of the Shooting Star should be close to zero.

The Upper Shadow of the Shooting Star should be as large as possible. The larger the Upper Shadow, the more important the Shooting Star.

Double Moving Average Crossover Chart Pattern

Double Moving Average Crossover Indicator

Implication– When a shorter and longer moving average (of a security’s price) cross each other (the event), a bullish or bearish signal is generated depending on the direction of the crossover.

Description

A moving average is an indicator that shows the average value of a security’s price over a period of time. This type of Technical Analysis occurs when a shorter and longer moving average cross each other. The supported crossovers are 21 crossing 50 (a short term signal) and 50 crossing 200 (a long term signal).

A bullish signal is generated when the shorter moving average crosses above the longer moving average. A bearish signal is generated when the shorter moving average crosses below the longer moving average.

These events are based on simple moving averages. A simple moving average is one where equal weight is given to each price over the calculation period. For example, a 21-day simple moving average is calculated by taking the sum of the last 21 days of a stock’s close price and then dividing by 21. Other types of moving averages, which are not supported here, are weighted averages and exponentially smoothed averages.

Trading Considerations

Moving averages are lagging indicators because they use historical information. Using them as indicators will not get you in at the bottom and out at the top but will get you in and out somewhere in between.

They work best in trending price patterns, where an uptrend or downtrend is firmly in place.
Using a crossover moving average as an indicator is considered to be superior to the simple moving average because there are two smoothed series of prices which reduces the number of false signals

Criteria that Supports
Indicators that are well suited to working with moving averages include the MACD and Momentum.

Criteria that Refutes

Moving averages do well in trending markets but they generate many false signals in choppy, sideways markets.

Price Crosses Moving Average Chart Pattern

Price Crosses Moving Average Indicator

Implication

When a security’s price crosses its moving average (the event), a bullish or bearish signal is generated depending on the direction of the crossover.

Description

A moving average is an indicator that shows the average value of a security’s price over a period of time. This type of Technical Analysis occurs when the price crosses a moving average. Three moving averages are supported: 21, 50 and 200 days. A price cross of a longer moving average indicates a longer term signal, in that the security may take a longer period of time to move in the anticipated direction.

A bullish signal is generated when the security’s price rises above its moving average and a bearish signal is generated when the security’s price falls below its moving average.

These events are based on simple moving averages. A simple moving average is one where equal weight is given to each price over the calculation period. For example, a 21-day simple moving average is calculated by taking the sum of the last 21 days of a stock’s close price and then dividing by 21. Other types of moving averages, which are not supported here, are weighted averages and exponentially smoothed averages.

Trading Considerations
Moving averages are lagging indicators because they use historical information. Using them as indicators will not get you in at the bottom and out at the top but will get you in and out somewhere in between.
They work best in trending price patterns, where an uptrend or downtrend is firmly in place.
In trending markets, moving averages can provide a very simple and effective method of identifying trends.
Moving averages also act as support areas. You will often see a stock in an uptrend rise well above its 21 day moving average, return to it and then rise again.
Moving averages also act as resistance areas. When a stock trades under a moving average, that average will serve as a resistance price and it will be difficult for the stock to move above it. This is often very true when a stock has fallen below its 200 day moving average.

Criteria that Supports
Indicators that are well suited to working with moving averages include the MACD and Momentum.

Criteria that Refutes
Moving averages do well in trending markets but they generate many false signals in choppy, sideways markets.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triple Moving Average Crossover Chart Pattern

Triple Moving Average Crossover Indicator

Implication-When a shorter moving average (of a security’s price) crosses a medium moving average, and the medium crosses a longer moving average, a bullish or bearish signal is generated depending on the direction of the crossovers.

Description

A moving average is an indicator that shows the average value of a security’s price over a period of time. This type of event occurs when a shorter moving average crosses a medium moving average, and the medium moving average crosses a longer moving average. The moving average periods used for this event are 4, 9 and 18 day. When the 4-day crosses above/below the 9-day moving average, the event has “started”. The event is “confirmed” when the 9-day moving average crosses above/below the 18-day moving average.

A bullish signal is generated when the direction of the crossovers is above e.g. the shorter crosses above the medium and the medium crosses above the longer. A bearish signal is generated when the direction of the crossovers is below.

These events are based on simple moving averages. A simple moving average is one where equal weight is given to each price over the calculation period. For example, a 9-day simple moving average is calculated by taking the sum of the last 9 days of a stock’s close price and then dividing by 9. Other types of moving averages, which are not supported here, are weighted averages and exponentially smoothed averages.

Trading Considerations

Moving averages are lagging indicators because they use historical information. Using them as indicators will not get you in at the bottom and out at the top but will get you in and out somewhere in between.

They work best in trending price patterns, where an uptrend or downtrend is firmly in place.

Criteria that Supports

Indicators that are well suited to working with moving averages include the MACD and Momentum.

Criteria that Refutes

Moving averages do well in trending markets but they generate many false signals in choppy, sideways markets.

Bollinger Bands Oscillator

Bollinger Bands Oscillator

Implication -When the price crosses one of the Bollinger band (upper or lower), a bullish or bearish event is generated depending on the direction of the crossovers.

Description

Bollinger bands use standard deviation and a moving average to help traders determine buy and sell events, or to help confirm other patterns. A price chart that uses Bollinger bands displays four lines; price, the upper and lower Bollinger bands, and the moving average.

The upper and lower Bollinger bands typically appear 2 standard deviations above and below the 20-day moving average. Recognia supports these typical settings.

For shorter-term trends, some technical analysts prefer 1 1/2 standard deviations with a 10-day moving average. For longer-term trends, a 2 1/2 standard 50-day moving average may better suit their purposes.

Price tends to bounce between the upper and lower Bollinger bands. The width between the bands does not remain constant. Typically, the expansion or contraction of the bands indicates periods of high or low volatility.

Trading Considerations

In Technical Analysis Explained, Martin J. Pring describes how he interprets price charts that use Bollinger bands. Here is a summary of what he keeps in mind when making trading decisions:

  • When the bands contract, price is considered more volatile. A price breakout may occur. Likewise, when the bands expand, price is considered less volatile.
  • When the price touches or exceeds either the upper or lower bands, an event is signalled, as the price trend generally continues. However, use the event as an indicator only, as price may reverse.
  • To determine whether a price reversal is imminent, observe how price behaves following the initial crossing. If the price makes several failed attempts to cross or touch a band again, you may see a price trend reversal.

Use Bollinger bands to help you monitor and predict price behavior. However, John Bolllinger himself acknowledges that other factors, such as RSI and patterns, should be considered for trading decisions.

Commodity Channel Index Stock Chart Pattern

Commodity Channel Index (CCI) Oscillator

Implication

Recognia identifies the following CCI events:

  • A bullish event when the CCI rises above the +100% line.
  • Another event signalling the end of the previous bullish trend occurs when the CCI subequently falls below the +100% line.
  • A bearish event when the CCI falls below the -100% line.
  • Another event signalling the end of the previous bearish trend occurs when the CCI subequently rises above the -100% line.

Description

Although the name CCI uses the term “commodity” the oscillator is commonly used for analyzing equities. A CCI is based on a comparison of price and moving average. The CCI is expressed as percentage that oscillates between -100 and 100. However, these levels can be exceeded.

Typically, if the price is greater than the moving average, then the CCI will rise towards or above the 100% line. If the price drops below the moving average, then the CCI will drop towards or past the -100% line. There are divergences and exceptions to this price/CCI behavior that technical analysts should be aware of when making trades.

This description provides a simplified explanation of CCI and its calculation – the actual computation is quite involved. The Encyclopedia of Technical Market Indicators, by Robert W. Colby, provides a detailed description of the calculations that are used to derive CCI. The CCI calculations are also freely available on a variety of websites.

Trading Considerations

Technical analysts use CCI in a couple of ways 1) to predict a price reversal, and 2) to determine overbought or oversold conditions.

To predict a price reversal, compare the direction trend lines for the price and CCI. If the direction of the price trend line is different than the direction of the CCI trend line a divergence is said to have occurred, and a price reversal may follow.

The most popular way to use the CCI is to watch for overbought or oversold conditions. A stock is considered overbought when it is reaches 100% or higher, and oversold when it is -100% or lower. Some technical analysts use CCI with the view that an overbought condition precedes a price drop, and that an oversold condition precedes a rise in price.

 

Colby, however, identifies the trading rules for using CCI as follows:

  • Buy long when CCI rises above 100%
    Buying long means that you are buying stock to own with the expectation that price will rise. You expect to earn a profit when you sell the stock at a higher price.
  • Sell long when CCI falls below 100%
    Selling long means selling stock that you own, ideally, at a higher price than when you bought it so that you will earn a profit.
  • Sell short when CCI falls below -100%
    Selling short means that you are selling stock that you have borrowed with the expectation that price will fall. If the price falls, you can profit by buying back the stock at a lower price and using it to replace the higher-priced stock that you borrowed. For example, if you sell stock for $100.00 per share, buy it back later at $70.00 per share, and then return the stock to the lender, your profit is $30.00 per share.
  • Cover short when CCI rises above -100%
    Covering short means that you are buying stock to replace stock that you have borrowed. To maximize your profit you will want to buy back the stock at a price that is lower than it was when you sold.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fast Stochastic Oscillator Chart Pattern

Fast Stochastic Oscillator

Implication

Recognia identifies an event for a fast stochastic oscillator when:

  • Bullish: %K and %D lines fall below and then rise above the 20 threshold, indicating bullish potential, along with a %K line cross above the %D line, triggering a bullish signal event if these 3 crossovers occur within a 5-day period.
  • Bearish: %K and %D lines rise above and then fall below the 80 threshold, indicating bearish potential, along with a %K line cross below the %D line, triggering a bearish signal event if these 3 crossovers occur within a 5-day period.

Description

The fast stochastic oscillator compares two lines called the %K and %D lines to predict the possibility of an uptrend or a downtrend. In price charts, the %K line typically appears as a solid line, and the %D line appears as a dotted line. The fast stochastic oscillator can be used effectively to monitor daily, weekly or monthly periods.

According to Martin J. Pring, George Lane developed the stochastic oscillator with the premise that during an uptrend, the closing price tends to rise. However, when the uptrend matures, price tends to close towards the bottom of the price range for the period. Likewise, in a downtrend, the reverse holds true.

The difference between the fast and slow stochastic oscillators is the way that the %K and %D values are calculated. Slow stochastics are based on the moving averages values calculated for fast stochastics. As such, John J. Murphy writes that most traders favor slow stochastics because they tend to be more reliable.

%K

For fast stochastics, the %K value is calculated as follows:

%K = 100 [(C-L)/(H-L)]

Where
C is the latest closing price of the stock
L is the lowest price of the stock for the period that you are monitoring. Recognia uses a 14-day period as the period to monitor.
H is the highest price of the stock for the period that you are monitoring. Recognia uses a 14-day period as the period to monitor.

%D

For fast stochastics, the %D value is based on a 3-period moving average of the %K value. The %D value is calculated as follows:

%D = 100 x (H-L)

Where
H is the sum of C-L in the last three periods
L is the sum of H-L in the last three periods

Pring identifies that a way to differentiate the %K line from the %D line is to remember that %K represents “Kwick” movements, while %D shows movements that “Dawdle”. As such, Edwards and Magee note that “[ordinarily], the %K Line will change direction before the %D Line. However, when the %D line changes direction prior to the %K line, a slow and steady Reversal is often indicated.”

Trading Considerations

This section identifies that inform trading decisions using stochastics. It should be pointed out, that many technical analysts use stochastics in combination with other patterns or oscillators. John J. Murphy, for example, suggests that “[one] way to combine daily and weekly stochastics is to use weekly signals to determine the market direction and daily signals for timing. It’s also a good idea to combine stochastics with RSI.”

When you are using stochastics with price charts, keep the following factors in mind:

  • Extremes
    When the %K line nears the 100% or 0% line a powerful move is set to occur. Some technical analysts equate the extremes with overbought or oversold conditions, and that prices cannot get any higher or lower. However, Edwards and Magee identify that this is not true in all situations, and that the extremes instead represent the strength of a price move.
  • Divergences
    A divergence is said to have occurred when the price and oscillator trend lines move in different directions. A price reversal may follow.
  • Hinges
    Lane referred to a flattened %K or %D line as hinges. A hinge may indicate that the uptrend or downtrend has become exhausted, and that a price reversal may occur.
  • Crossovers
    When the price has reached 80 or higher, and a divergence has occurred, a crossover is the sell signal. To summarize Lane, Robert W. Colby writes that “the sell signal is more reliable when %D has already turned down when %K crosses below %D”.”

    Similarly, when the price has reached 20 or lower, and a divergence has occurred, a crossover becomes the buy signal. Robert W. Colby writes that “the buy signal is more reliable when %D has already up down when %K crosses above %D”.”

 

 

 

 

 

Know Sure Thing (KST) Oscillator

Know Sure Thing (KST) Oscillator

Implication
A bullish signal is generated when the KST, “Know Sure Thing”, rises above its moving average. When the KST falls below its moving average, the Technical Analysis is a bearish signal.
Supported “Short-term KST” events are suitable for investors interested in a time frame of 2-6 weeks. “Intermediate-term KST” events are suitable for those interested in 6-39 week trends. Supported “Long-term KST” events are suitable for a 9-month to 2-year time frame.

Description
Price at any one time is determined by the interaction of many different time spans. Normally oscillators are constructed from a single time span so they ignore cycles not related to that specific period. The KST, on the other hand, consists of four different periods that are combined into one oscillator. Each time span used in the KST is smoothed with a moving average. Weightings are given to each moving average according to the length of the time span. Longer periods have greater weight in order to bring out a smoother curve. The KST changes direction sooner in response to price moves than similar oscillators using one time span because of the inclusion of shorter time spans.

The KST can be interpreted in the same way as other smoothed oscillators but most commonly indicates bullish and bearish momentum signals as it crosses above and below its moving average respectively. Because of the leading characteristics of this oscillator, it is important to make sure that some kind of trend confirmation is given by the price itself. This could be a price pattern breakout, trendline violation or moving average crossover.

Three time frames are supported (short-term, intermediate-term and long-term), however the KST can be calculated for trends of any other term. For more information on the relationship between these trends please visit http://www.pring.com/ksttheory.htm. For educational movies on the KST and other technical concepts please visit http://www.pring.com/movies.htm. Further information on the KST can be found in the book “Technical Analysis Explained” by Martin J. Pring.

 

Note that Intermediate-term KST events from this service are recognized at the end of the week in which the crossover was found. For example, the event date is always on a Friday even if the crossover occurred in the middle of the week. Similarly, Long-term KST events are recognized at the end of the month in which the crossover occurred, therefore the event date is always the end of the month even if the crossover occurred mid-month.

Trading Considerations

The KST usually moves in a deliberate path which means that changes in direction offer bullish and bearish momentum signals. When the KST turns upward this indicates a bullish situation. When it turns downward, a bearish situation is likely. This service recognizes events when the KST crosses its moving average, which indicates a more distinct change in direction. This is the more reliable approach to interpreting the KST. However the investor may look for earlier signals by watching for changes in the direction of the KST before a crossover might occur; in particular the investor may watch for the KST converging with its moving average to anticipate a crossover earlier.

Usually it is better to delay trading decisions until the price confirms the situation implied by the KST. This confirmation might be a trendline violation, price pattern breakout or moving average crossover.
Overbought and oversold reversals have a higher degree of reliability than reversals that take place near the equilibrium level. The magnitude of KST fluctuations will depend on the volatility of the price and the type of trend being measured. This means that overbought/oversold levels are determined on a trial and error basis with reference to the oscillator’s past history.
Divergences (when market trends go in a different direction than market indicators predicted, usually signifying the onset of a trend change) occur when the price makes a new high (or low) that is not confirmed by a new high (or low) in the KST. Prices usually correct and move in the direction of the KST.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Moving Average Convergence/Divergence (MACD) Oscillator

Moving Average Convergence/Divergence (MACD) Oscillator Chart Pattern

Implication
When the MACD crosses the signal line or the zero line (the event), a bullish or bearish signal is generated depending on the direction of the crossovers.

Description
The MACD, “Moving Average Convergence/Divergence”, shows the relationship between two moving averages of prices. The MACD is the difference between a 26-day and 12-day exponential moving average. A 9-day exponential moving average called the “signal line” is plotted on top of the MACD to show bullish and bearish signal points. A bullish signal is generated when the MACD rises above the signal line, or above zero. A bearish signal occurs when the MACD falls below the signal line or below zero.

Trading Considerations
The MACD is best used in strongly trending markets.
The MACD indicates overbought and oversold conditions. An overbought situation occurs when prices have risen too far too fast and are ready for a downward correction. An oversold situation occurs when prices have fallen too far too fast and are ready for an upward correction. When the shorter moving average pulls away from the longer moving average (i.e., the MACD rises), it is likely that the financial instrument’s price is too high and will soon return to more realistic levels.
An indication that an end to the current trend may be near occurs when the MACD diverges from the financial instrument’s price. A bearish divergence occurs when the MACD is making new lows while prices fail to reach new lows. A bullish divergence occurs when the MACD is making new highs while prices fail to reach new highs. Both of these divergences are most significant when they occur at relatively overbought/oversold levels.

Momentum Oscillator Chart Pattern

Momentum Oscillator Chart Pattern

Implication

When the Momentum rises above 0 (a Technical Analysis), a bullish signal is generated. When the Momentum falls below 0, the Technical Analysis is a bearish signal.

Description

Momentum measures the amount that a financial instrument’s price has changed over a given timeframe. Momentum is significant because it signals the strength of price trends. A healthy price trend tends to exhibit strong momentum, while weakening trends often have decreasing momentum indicating a trend reversal or correction. Momentum can also indicate short-term market extremes referred to as overbought and oversold levels. A bullish signal is generated when the Momentum rises above 0 and a bearish signal is generated when the Momentum falls below 0.

Momentum is calculated as a ratio of today’s price compared to the price n periods ago. The formula is [Close/(Close n time-periods ago) times 100].

Trading Considerations
Momentum can be used as a trend-following oscillator similar to the MACD. A bullish signal is generated when the indicator bottoms and turns up. A bearish signal is generated when the indicator peaks and turns down.
If the Momentum indicator reaches extremely higher low values (relative to its historical values), a continuation of the current trend may be called for. For example, if the Momentum indicator reaches extremely high values and then turns down, one could assume prices will probably go still higher. In either case, only trade after prices confirm the signal generated by the indicator (e.g., if prices peak and turn down, wait for prices to begin to fall before selling).
The Momentum indicator can also be used as a leading indicator. This method assumes that market tops are typically identified by a rapid price increase (when everyone expects prices to go higher) and that market bottoms typically end with rapid price declines (when everyone wants to get out). As a market peaks, the Momentum indicator will climb sharply and then fall off–diverging from the continued upward or sideways movement of the price.

Similarly, at a market bottom, the Momentum indicator will drop sharply and then begin to climb well ahead of prices. Both of these situations result in divergences between the indicator and prices.

Relative Strength Index (RSI)

Relative Strength Index Oscillator (RSI) Chart Pattern

Implication

When the RSI falls below 30 (a Technical Analysis), a bullish signal is generated. When the RSI rises above 70, the Technical Analysis is a bearish signal.

Description

The Relative Strength Index (RSI) is an oscillator that measures a particular financial instrument’s current relative strength compared to its own price history. The RSI should not be confused with relative strength which rates a financial instrument in relation to a market such as the S&P index.
The RSI is plotted on a vertical scale numbered from 0 to 100. The formula to calculate the RSI is 100-[100/(1+A)] where A is the average of the “up” closes over the calculation period divided by the average of the “down” closes over the calculation period.

Different calculation periods can be used. The most popular is a 14-day period. The “A” for a 14-day period is calculated by dividing the 14-day “up” close average by the 14-day “down” close average. An “up” close or a “down” close is defined as the absolute change in price from close to close.

Trading Considerations
The RSI sometimes shows more clearly than the price chart itself the support and resistance lines for a financial instrument. Failure Swings which are also known as support or resistance penetrations or breakouts can be detected by using the RSI. Failure swings occur when the RSI passes a previous high or falls below a recent low.
Divergences (when market trends go in a different direction than market indicators predicted, usually signifying the onset of a trend change) occur when the price makes a new high (or low) that is not confirmed by a new high (or low) in the RSI. Prices usually correct and move in the direction of the RSI.

A financial instrument is considered to be oversold when its RSI falls below 30 and overbought when its RSI rises over 70.

Slow Stochastic Oscillator Chart Pattern

Slow Stochastic Oscillator

Implication

Recognia identifies an event for a slow stochastic oscillator when:

  • Bullish: %K and %D lines fall below and then rise above the 20 threshold, indicating bullish potential, along with a %K line cross above the %D line, triggering a bullish signal event if these 3 crossovers occur within a 5-day period.
  • Bearish: %K and %D lines rise above and then fall below the 80 threshold, indicating bearish potential, along with a %K line cross below the %D line, triggering a bearish signal event if these 3 crossovers occur within a 5-day period.

Description

The slow stochastic oscillator compares two lines called the %K and %D lines to predict the possibility of an uptrend or a downtrend. In price charts, the %K line typically appears as a solid line, and the %D line appears as a dotted line. The slow stochastic oscillator can be used effectively to monitor daily, weekly or monthly periods.

According to Martin J. Pring, George Lane developed the stochastic oscillator with the premise that during an uptrend, the closing price tends to rise. However, when the uptrend matures, price tends to close towards the bottom of the price range for the period. Likewise, in a downtrend, the reverse holds true.

The difference between the slow and fast stochastic oscillators is the way that the %K and %D values are calculated. Slow stochastics are based on the moving averages values calculated for fast stochastics. As such, John J. Murphy writes that most traders favor slow stochastics because they tend to be more reliable.

%K

For slow stochastics, the %K value is based on a 3-period moving average of the %K fast stochastics value. See fast stochastics for information about the %K calculation.

%D

For slow stochastics, the %D value is based on a 3-period moving average of the %K slow stochastics value (described above).

Pring identifies that a way to differentiate the %K line from the %D line is to remember that %K represents “Kwick” movements, while %D shows movements that “Dawdle”. As such, Edwards and Magee note that “[ordinarily], the %K Line will change direction before the %D Line. However, when the %D line changes direction prior to the %K line, a slow and steady Reversal is often indicated.”

Trading Considerations

This section identifies that inform trading decisions using stochastics. It should be pointed out, that many technical analysts use stochastics in combination with other patterns or oscillators. John J. Murphy, for example, suggests that “[one] way to combine daily and weekly stochastics is to use weekly signals to determine the market direction and daily signals for timing. It’s also a good idea to combine stochastics with RSI.”

When you are using stochastics with price charts, keep the following factors in mind:

  • Extremes
    When the %K line nears the 100% or 0% line a powerful move is set to occur. Some technical analysts equate the extremes with overbought or oversold conditions, and that prices cannot get any higher or lower. However, Edwards and Magee identify that this is not true in all situations, and that the extremes instead represent the strength of a price move.
  • Divergences
    A divergence is said to have occurred when the price and oscillator trend lines move in different directions. A price reversal may follow.
  • Hinges
    Lane referred to a flattened %K or %D line as hinges. A hinge may indicate that the uptrend or downtrend has become exhausted, and that a price reversal may occur.
  • Crossovers
    When the price has reached 80 or higher, and a divergence has occurred, a crossover is the sell signal. To summarize Lane, Robert W. Colby writes that “the sell signal is more reliable when %D has already turned down when %K crosses below %D”.”

    Similarly, when the price has reached 20 or lower, and a divergence has occurred, a crossover becomes the buy signal. Robert W. Colby writes that “the buy signal is more reliable when %D has already up down when %K crosses above %D”.”

 

 

 

 

 

 

 

 

 

Williams %R Oscillator Stock Chart Pattern

Williams %R Oscillator

Implication

Bullish: %R rises back above -80 and continues to cross above the -50 line within 14 days. We identify an event at the -50 line crossover.

Bearish: %R falls back below -20 and continues to cross below the -50 line within 14 days. We identify an event at the -50 line crossover.

Description

The %R oscillator is very similar to the stochastic oscillator. However, the %R oscillator is expressed in negative values. For simplicity, many technical analysts would suggest that you ignore the negative symbols altogether. The goal of the %R oscillator is to detect overbought or oversold conditions. According to John J. Murphy, the %R oscillator measures “the latest close in relation to its price range over a given number of days”. The specific calculation for the %R oscillator is freely available on the web and other resources. Recognia uses a 14-day period to detect events, which is the typical period to monitor.

Trading Considerations

When the %R line nears the -80% line an oversold condition may occur, causing a price reversal. Likewise, when the %R line nears the -20% line an overbought condition may occur. Some technical analysts prefer to use the -75% and -25% lines to indicate oversold/overbought conditions.

It should be pointed out that an event at the -80% or -20% lines does not necessitate a price reversal. In fact, the price can continue to rise or fall.

Divergence will give you a better sense of the likelihood of a price reversal. Divergence occurs when the price and oscillator trend lines move in different directions. When a divergence occurs, a price reversal may follow.

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