Head and Shoulders Top Reversal Pattern
The price moves in an uptrend. Only after the pattern has formed, you will recognize A as the left shoulder (figure 4.39). The price drops back to the support B of the up-going trendline. From here, the price makes a last move up to C often with lower volume compared to the A move. This will be the head of the pattern. The turning point at B will be part of the neck line.
Next the price drops through the up-going trendline and falls back to the level of the neck line D. After that, the price will move up again to E to form the right shoulder. From here the price will drop below the neck line making lower lows.
The shoulders (A-E) and the neck line (B-D) in the head and shoulders formation should be at about the same price level and at about the same distance in time from the head.
The head and shoulders pattern is confirmed when the price falls below an up-trending neck line or after the right shoulder in case of a down-trending neck line.
ATTENTION! In approximately half of the cases, there is a bounce back up to the neck line G, or even up to between the neck line and the right shoulder.
Head and Shoulders Bottom Reversal Pattern
Mirroring the head and shoulders top reversal pattern gives a head and shoulders bottom reversal pattern. Shoulder bottoms should be at around the same price level and at about the same distance from the head.
The head and shoulders bottom reversal pattern is confirmed when the price moves above a descending neck line or after the right shoulder with an ascending neck line.
ATTENTION! In approximately half of the cases, there is a bounce back down to the neck line or even down to between the neck line and the right shoulder.
an example of a head and shoulders bottom reversal.
Double Tops and Bottoms
A double top reversal pattern is formed with a large demand during the formation of the first top and a lack of demand with the second top.
The pattern is confirmed when the price falls below the level of the middle reaction.
Double Bottom
For a double bottom, the reasoning is analogous to that of a double top. The trend is down, and a double bottom pattern is formed as an indication that the trend probably will reverse.
With daily price bars, bottoms are separated by about four to eight weeks (figure 4.47) and should only have a small difference in price level. The in between reaction should have a price rise of about 10% measured from the first bottom.
With 80% reversals, this pattern is very reliable.
The pattern is confirmed when the price rises above the level of the middle reaction.
The pattern is confirmed when the price rises above the level of the middle reaction.
Rounding Bottoms
A rounding bottom pattern (rounded bowl shape) appears on daily and weekly bar charts.
This pattern takes time to complete.
The price can peak halfway through the pattern, but usually it retraces most of it quickly.
Rounding bottoms are becoming rare because of the high volatility of the markets as a result of the information society.
Rounding bottoms lead to a price reversal 90% of the time.
a rounding bottom starts with a steep falling trendline that with time, becomes increasingly flat.
The opposite is true in most of the other patterns; that is, you start with a flat trendline and finish with a steeper trendline.
The pattern confirms when the price closes above the highest peak of the pattern. There may be a saucer lip when the price drops temporarily before continuing the uptrend.
The opposite is true in most of the other patterns; that is, you start with a flat trendline and finish with a steeper trendline.
The pattern confirms when the price closes above the highest peak of the pattern. There may be a saucer lip when the price drops temporarily before continuing the uptrend.
V-formations
In a V-formation, you are looking for a V-shaped reversal pattern from a range of bars. A bottom reversal creates a V-character; a top reversal creates an inverted V-character.
The price at the start of the V-formation will form either a one-day reversal, an island reversal, or a spark.
An island reversal occurs when there is a window between the prices of today, the previous day, and the following day(s).
A spark is a big, one-day high volatility price move. A V-formation start can be recognized most of the time when it breaks the last possible steep trendline, together with a candle stick reversal pattern just before, and a one-day island or spark reversal.
you can see higher bottoms and lower tops; this creates a symmetrical triangle. A breakout in the direction of the previous trend confirms the continuation pattern.
Rounding top reversal pattern. A rounding top starts with a steep rising trendline which with time becomes increasingly flat. Rounding tops as a reversing pattern break to the down side and lead to a farther move down 90% of the time. The pattern confirms when the price closes below the left-hand border or with a saucer lip when breaking the right-hand side of the border.
Rounding top continuation pattern. A rounding top as a continuation pattern is confirmed when the price moves above the highest point of the rounding top
The price at the start of the V-formation will form either a one-day reversal, an island reversal, or a spark.
V-formation; one day top reversal.
A one day top reversal arises if the price makes a new high on the same day and reverses and closes below the closing price of the previous day. A one-day top reversal in a candle chart is a black candle and often is part of a candlestick pattern.
A one-day bottom reversal
arises if the price makes a new low on the same day and reverses and closes above the closing price of the previous day.An island reversal occurs when there is a window between the prices of today, the previous day, and the following day(s).
A spark is a big, one-day high volatility price move. A V-formation start can be recognized most of the time when it breaks the last possible steep trendline, together with a candle stick reversal pattern just before, and a one-day island or spark reversal.
Continuation Patterns
Triangles
Triangles in an Uptrend
Symmetrical triangle pattern.
you can see higher bottoms and lower tops; this creates a symmetrical triangle. A breakout in the direction of the previous trend confirms the continuation pattern.
Descending triangle pattern.
In the daily chart lower tops are made in an uptrend. Next, the price drops back to horizontal support levels, and a descending triangle is created. A breakout in the direction of the previous trend confirms the continuation pattern.
The Rectangle
Rectangle in an Uptrend
Rectangle in a down trend
Flags and Pennants
With a continuation of the previous trend 90% of the time, flags and pennants are reliable short term continuation patterns. They create a pause from 5 up to 25 bars in the current trend and then continue the previous trend. Most of the flags and pennants take up from 10 to 15 bars. Generally, the volume goes down during this phase.
Flags in an Uptrend
Pennants in a Downtrend
Reversing/Continuation Patterns
Rounding Top as a Reversing Pattern
Rounding Top as a Continuation Pattern
Diamond Formation
Diamond Formation as a Continuation Pattern
Diamond Formation as a Reversal Pattern
Top Reversal
