Guide to Chart Patterns

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Head & Shoulders

The Head and Shoulders Bottom (Reverse Head and Shoulders)
is created by three successive declines in the price following a significant downtrend. The lowest low (head) is in the middle, flanked by two higher lows (shoulders) at roughly the same level.
Volume is highest as the price makes the first two declines, then diminishes through the right shoulder. Finally volume surges as the price closes above the neckline – drawn between the two highs – to confirm the BULLISH reversal. The Head and Shoulders Top is the bearish counterpart signaling a major trend
reversal downward.

Triple Bottoms
The Triple Bottom starts with prices moving downward,
followed by three sharp lows, all at about the same price level. Volume diminishes at each successive low and finally bursts as the price rises above the highest high, confirming the pattern as a sign of BULLISH price reversal. A Triple Top is the bearish counterpart signaling the reversal of a prior uptrend to form a new downtrend.

Triangles

A BULLISH Triangle shows two converging trendlines as prices reach lower or stable highs and higher lows. Volume diminishes as the price swings back and forth between an increasingly narrow range reflecting uncertainty in the market direction. Then well before the triangle reaches its apex, the price breaks out above the upper trendline with a noticeable increase in volume, confirming the pattern as a continuation of the prior uptrend. Triangles can also appear during a downtrend, signaling a bearish continuation when the price penetrates the lower trendline. That can also be seen as top or bottom patterns marking a trend reversal.

Double Bottoms

The Double Bottom pattern marks the reversal of a prior downtrend. The price forms two distinct lows at roughly the same price level. For a more significant reversal, look for a longer period of time between the two lows. Volume reflects a weakening of the downward pressure, tending to diminish as the pattern forms, with some pickup at each low, less on the second low. Finally the price breaks out above the highest
high to confirm the BULLISH signal. Strong volume on breakout
is always a good sign. The Double Top is the bearish counterpart, marking the topping out of an uptrend and initiation of a downtrend.

Diamonds

Diamond patterns usually form over several months in very active markets. Volume will remain high during the formation of this pattern. The pattern begins as 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 direction of the breakout signals the resolution to a new trend—upward or downward out of the diamond’s boundary lines. This pattern can mark the resumption of a prior trend (Continuation Diamond) or a significant trend reversal (Diamond Top or Bottom).

Megaphones

The rare Megaphone Bottom—a.k.a. Broadening Pattern—can be recognized by its successively higher highs and lower lows, which form after a downward move. The BULLISH pattern is confirmed when, usually on the third upswing, prices break above the prior high but fail to fall below this level again. The bearish counterpart is the Megaphone Top.

Upside Breakouts

An Upside Breakout occurs when the price breaks out through the top of a trading range marked by horizontal boundary lines across the highs and lows. This pattern indicates that prices may rise explosively over a period of days or weeks as a sharp uptrend appears. A breakout from a longer and narrower trading range makes for a stronger and more reliable BULLISH signal. Conversely, a bearish Downside Breakout is observed when prices break out below the lower boundary.

Flags & Pennants
A BULLISH Flag follows a steep rise in price called the “flagpole”, often the reaction to a positive announcement. It’s marked by two parallel trendlines around a period of consolidation that occurs as excitement subsides and volume decreases. The Flag can be

horizontal or slightly downward. Finally the price breaks the upper trendline marking the resumption of the uptrend. Bearish Flags can be spotted during a steep drop in price with the flag horizontal or slightly upward. Pennants are similar to flags however the trendlines are converging rather than parallel.

Rounded Bottoms

Following a downtrend, the Rounded Bottom forms a gradual bowl shape reflecting a gradual shift in the balance of supply and demand. Volume tends to mirror the price pattern, decreasing 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. The BULLISH pattern is confirmed when the price crosses above its moving average. The outcome sees volume reach a climactic peak in a few days of nearly vertical price movement on the chart.

Wedges

A BULLISH Continuation Wedge consists of two converging trend lines. 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. 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. The pattern is confirmed when prices break
above the upper trendline. The bearish counterpart appears with converging trendlines pointing slightly upward.