Classic Chart Patterns

• Two types of patterns – Reversal patterns which identify changes in market trend

• Key reversal

• Double and triple tops and bottoms

• Head and shoulder tops and bottoms

• Saucer bottoms

– Continuation patterns which represents midcourse corrections • Flags

• Pennants

• Triangles

• Wedges

• Volume and open interest – Confirmation of all the patterns.

• Most patterns have measuring techniques which great

objectives for the next move.

Reversal Patterns

• Common to all reversal patterns

– There must be an identifiable trend.

– Bottoms often have gradual basing and move with increased

volume

– Topping patterns are much more volatile than bottoms.

– The longer the trend is in place the more substantial the reversal

move.

– First signal of a reversal is the violation of a trendline.

Double and Triple Tops

• Very similar to the head and shoulders top.

• Triple top has three peaks and two troughs as does the

head and shoulder.

• The neckline connects the two troughs usually very little

slope.

• Breakdown is achieved by braking the neckline and testing

the breakdown point and holding it.

• Distance from top to neckline provides a downside

objective for both double and triple top.

Head and Shoulders

• The top formation has three high peaks with the middle

peak higher than the other two.

• Characteristics

– The is symmetry in the shoulders either simple or complex.

– Neckline can have an up or down slope.

– Neckline slope is normally not very steep.

– Breakout of the pattern is penetration of the neckline on high

volume and a test of the neckline which must hold.

Source: chartpatterns.com

Rounded Bottom or Saucer Bottom

• Saucer bottom is gradually rounding bottom.

• According to Investors Business Daily, a very high

percentage of stock bottom with this formation.

• Bullish reversal pattern.

• Price curves up to a level closed to the congestion level at

the beginning of the saucer.

• Retraces down to form the handle of cup and takes out the

recent high with high volume to start bull move.

Continuation Patterns

• Triangles

– Symmetrical

– Ascending

– Descending

• Flags

• Pennants

• Rectangular Formations

Symmetrical Triangle

• Forms two trendlines the descending line has lower highs and the ascending line has higher lows.

• Usually breaks out of the triangle in the same direction it entered the triangle. Continuation.

• There are normally three waves within the triangle.

• The closer the price gets to the apex of the triangle the higher the probability of a false breakout.

• Volatility get lower as the trading ranges get smaller.

• Volume also recedes,

• The distance from the beginning of the trend to the entry into the triangle creates a profit objective upon exit from the triangle.

Source: chartpatterns.com

Source: chartpatterns.com

Ascending Triangle

• The triangle is create by horizontal top and an ascending

upward trendline.

• Breakout is upward through the horizontal line.

• Also has a three wave count within the triangle.

• Breakout should be accompanied by high volume.

• Often the breakout point will be tested on a retracement

and holds.

Source: chartpatterns.com

Source: chartpatterns.com

Descending Triangle

• Descending triangle is created by a horizontal trendline

along the bottoms and a down sloping trendline connecting

highs.

• Market usually enters in a downward direction and exits to

the down side. Continuation pattern.

• There is usually a three wave count within the triangle

formation.

• Breakout is normally accompanied by high volume.

Flags and Pennants

• Flags and pennants represent a rest after a sharp move. This creates

the flag or pennant pole.

• Pennants then form a symmetrical triangle at the top of the pole. As a

continuation pattern the breakout is in the same direction as the price

entered the pennant.

• Flags then form a small trend channel. Bullish trend is a declining trend

channel and a bearish trend forms an ascending trend channel.

• Both tend to have a three wave formation, breakout with higher volume,

and test the breakout point.

• All trends need to take a rest, this behavior results in these continuation

patterns.

• Within the consolidation period volume and volatility tends to contract.

Expands on breakout.

Source: chartpatterns.com

Rectangular or Sideways Market

• A rectangle is a continuation pattern in which there is a

horizontal trading range where the highs and lows are at

the same level. A horizontal trend channel describes the

market action.

• Volume and volatility consolidate within the rectangle and

expands as the market exits the formation.

• The rectangle can also be a high or low the key is to trade

in the direction of the breakout of the trading bracket, either

direction.

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