The Concept of Trend

Uptrend.

When a stock is rising over time it is said to be in an uptrend. As it rises, it's price makes higher "highs" and higher "lows". A straight line drawn on a stock chart, passing through the higher "lows" is referred to as the support line. Anytime a stock on an uptrend breaks through it's support line is a time to keep a close watch on the stock as it may reverse direction.

Downtrend.

When a stock is falling over time it is said to be in an downtrend. As it falls, it's price makes lower "highs" and lower "lows". A straight line drawn on a stock chart, passing through the lower "highs" is referred to as the resistance line. Anytime a stock on an downtrend breaks through it's resistance line is a time to keep a close watch on the stock as it might begin to on an uptrend.

Bearish Continuation Patterns

A bearish continuation patterns occurs when a stock in a downtrend consolidates for sometime before continuing on it's downtrend. A stock after, it's been on a downtrend, usually moves sideways or consolidates for while before it continues on it's downtrend. The following are usually very recognizable patterns.

Descending Triangle.

This is usually a fairly safe pattern to trade. Average trading volume generally decreases as the pattern is formed. To calculate the predicted target price, subtract the price of the lower trendline from the upper one from the start of the formation. Take this result and subtract it from the lower trend line. This is the predicted target price. A pullback after a breakout often occurs before the price of the stock declines to it's predicted target price. The duration of this pattern is usually about 3 months.

Symetrical Triangle - In a Downtrend.

A symmetrical triangle can breakout in either direction. If it breaks out to the upside, it might be a reversal pattern. Since this section is about bearish continuation patterns, we'll consider breaking out to the downside. To compute the predicted target price, subtract the highest price from the lowest price in the pattern. Take this result and subtract it form the lowest price in the pattern. This is the predicted target price. A pullback after a breakout often occurs before the price of the stock declines to it's predicted target price. Trading volume in this pattern diminishes before a breakout. The duration of this pattern is usually about 3 months.

Flag.

This is a short term consolidation pattern. The duration of this pattern is only from a few days to a few weeks. It should never be more. As with most consolidation patterns, volume usually diminishes as the pattern is forming. To calculate the predicted target, take the difference between the start of the downtrend and the formation. Prices should move at least this amount below the formation. As in every pattern, always wait for a breakout first.

Pennant.

This is a short term consolidation pattern much like the flag pattern. The duration of this pattern is only from a few days to a few weeks. It should never be more. As with most consolidation patterns, volume usually diminishes as the pattern is forming. To calculate the predicted target, take the difference between the start of the downtrend and the formation. Prices should move at least this amount below the formation. As in every pattern, always wait for a breakout first.

Rectangle.

The duration of this pattern is usually about three months. Prices can break out in either direction. Since we are considering bearish continuation patterns in this section, we'll consider a break out to the downside. To calculation the predict target price, take the difference between the top trend line and bottom trend line. Take this result and subtract it from the bottom line. This is the predicted target price. A pullback after a breakout very often occurs before the price of the stock declines to it's predicted target price. As with most consolidation patterns, volume usually diminishes as the pattern is forming.

Bearish Reversal Patterns

A bearish reversal pattern may form when sentiment changes on a stock that has been in an uptrend.

Head and Shoulder -Top.

The Head and Shoulders pattern is one of the most widely known and recognized patterns. The duration for this pattern is generally several months. The trading volume generally diminishing from the left of the pattern to the right. The neckline could slope upward or downward although it is shown level here. As with all patterns, wait for confirmation. The pattern is only valid if the price closes below the neckline. To calculate the predicted target price take the highest price in the head and subtract it from the neckline. This is the formation height. Subtract the formation height from the neckline to give you the predicted target price. There are variations to this pattern, not shown here, called "complex head and shoulders" patterns in which you may have multiple shoulders or heads or both.

Double Top.

A double top formation is also a very recognizable with two well defined peaks that are usually close in price. The duration of this pattern is usually several months. To calculate the predicted target price, first calculate the height of the formation by subtracting the lowest price (confirmation line) in the formation from the highest price in the formation. Then subtract the formation height from the lowest price or the confirmation line. The likelihood that price will pullback after a breakout are high so you could even wait until a pullback to place a trade.

Rectangular Top.

This pattern usually forms for about three months. Rectangular Tops can breakout in either direction. We will consider a breakout to the bottom, since this section is bearish reversal patterns. If a breakout is to the bottom, the predicted target price is calculated as follows. Subtract the upper trendline from the bottom trendline. Then subtract that value from the bottom trendline. The result is the predicted target price.

Bullish Reversal Patterns

A bullish reversal pattern may form when sentiment changes on a stock that has been in an downtrend.

Head and Shoulder -Bottom.

The Head and Shoulders pattern is one of the most widely known and recognized patterns. The duration for this pattern is generally several months. The trading volume generally diminishing from the left of the pattern to the right. The neckline could slope upward or downward although it is shown level here. As with all patterns, wait for confirmation. The pattern is only valid if the price closes above the neckline. To calculate the predicted target price take the neckline and subtract it from the lowest price in the head. This is the formation height. Add the formation height from the neckline to give you the predicted target price. There are variations to this pattern, not shown here, called "complex head and shoulders" patterns in which you may have multiple shoulders or heads or both.

Double Bottom.

A double bottom formation is also a very recognizable with two well defined troughs that are usually close in price. The duration of this pattern is usually several months. To calculate the predicted target price, first calculate the height of the formation by subtracting the lowest price in the formation from the highest price (confirmation line) in the formation. Then add the formation height to the confirmation line. The likelihood that price will throwback after a breakout are high so you could even wait until a throwback to place a trade.

Rectangular Bottom.

A rectangular bottom is a great pattern to trade. It's easy to identify and performs really well. The duration of this pattern can be 6 months or more. Trading volume generally increases with the length of the pattern. To calculate the predicted target price, subtract the higher trend line from the lower trendline and add this to the higher trendline or confirmation line. Throwbacks after a breakout occur more than half of the time.

Rounding Bottom.

A rounding bottom is a pattern that generally takes 6 months or more to form. Trading volume is usually heavier near the sides of the bowl than in the middle. A breakout is defined when the price closes above the left lip of the saucer. To calculate the minimum price move, subtract the lowest low from the right saucer lip. Add this difference to the right saucer lip and this is the minimum expected price move.

Falling Wedge.

The falling wedge is also a great pattern to trade. The duration of this pattern is usually 3 months or less. Trading volume tends to wane as the pattern forms before the breakout. Throwbacks occur in almost half of the patterns. At a minimum, prices should rise to the top of the formation from the breakout.

Bullish Continuation Patterns

A bullish continuation patterns occurs when a stock in an uptrend consolidates for sometime before continuing on it's uptrend. Below are some very recognizable patterns .

Ascending Triangle.

The ascending triangle is an easily recognizable pattern that offers very good performance. It's duration is about 3 months are less. Trading volume generally diminishes as the pattern forms. The minimum target price after a breakout occurs is the height of the pattern at the beginning of the formation added to the horizontal trendline.

Symmetrical Triangle - In an Uptrend.

A symmetrical triangle can breakout in either direction. If it breaks out to the downside, it might be a reversal pattern. Since this section is about bullish continuation patterns, we'll consider a breakout to the upside. To compute the predicted target price, subtract the highest price from the lowest price in the pattern. Take this result and add it to the highest price in the pattern. This is the predicted target price. A throwback occurs more than half the time. Trading volume in this pattern diminishes before a breakout. The duration of this pattern is usually about 3 months or less.

Rectangular Top - In an Uptrend.

A rectangle top is a great pattern to trade. It is very easy to recognize and offers excellent performance. A breakout can occur in either direction but a breakout to the upside usually offers better performance. Trading volume generally decreases during this consolidation period. To calculate the minimum price move subtract the upper trendline from the lower trendline. This is the formation height. Take the formation height and add it to the upper trendline to give you the minimum expected move.

Flag - In an Uptrend.

This is a short term consolidation pattern. The duration of this pattern is only from a few days to a few weeks. It should never be more. As with most consolidation patterns, volume usually diminishes as the pattern is forming. To calculate the predicted target price, take the difference between the formation and start of the uptrend. Prices should move at least this amount above the formation. As in every pattern, always wait for a breakout first.

Pennant - In an Uptrend.

This is a short term consolidation pattern much like the flag pattern. The duration of this pattern is only from a few days to a few weeks. It should never be more. As with most consolidation patterns, volume usually diminishes as the pattern is forming. To calculate the predicted target price, take the difference between the formation and start of the uptrend. Prices should move at least this amount above the formation. As in every pattern, always wait for a breakout first.

Rounding Top.

A rounding top is a long-term pattern with a duration of 6 months or more. Stock prices curve around forming a dome. Trading volume is heavier on the sides of the dome. A breakout is defined when prices eventually close above the highest price on the dome. The target price once a breakout occurs is as follows. Subtract the right dome low from the formations high. And this result to the high to get the target price.

Broadening Formation - Right-Angled Ascending.

This is an interesting pattern that typically forms over a period of three months or less. At first it appears very negative. However, if prices breakout to the upside, gains are usually very good. The trading volume is usually irregular. To calculate the predicted target price, calculate the difference between the horizontal top line and the lowest low in the formation. Add this difference to the horizontal top line and you get the predicted target price.

Cup with Handle.

A Cup with Handle pattern is usually forms in 3 months or less. The difference between this pattern and Rounding Bottom pattern is that this pattern forms after a stock has been in an uptrend for some time.

Charting Guidelines

There are several guidelines to keep in mind when trying to identify chart patterns.

• Reading and interpreting stock charts is an art not a science.
• Real stocks almost never make nice neat easily identifiable patterns on chart .
• Always wait for a breakout to confirm a stock chart pattern. Just because the stock chart pattern may appear as if it's forming a particular pattern, it's not valid until there is a breakout.
• A particular stock chart pattern does not guarantee the stock will behave in a certain way. It only increases the odds that it will.
• Always read charts in the LOG format rathar than linear format.
• The same principles that apply to daily charts can be applied to weekly and monthly charts.
• Don't try and force yourself to see a pattern if it's not there.
• Never bet the farm on any stock chart pattern.