Figure: Rounding bottom (saucer bottom) reversal
The time distance from the initial peak to the long-term low is considered to be half the distance of the rounding bottom. This helps to give chartists an idea to as to how long the chart pattern will last or when the pattern is expected to be complete, with a breakout to the upside. For example, if the first half of the pattern is one year, then the signal will not be formed until around a year later.
In terms of the chart pattern's quality, the two stages of the rounding bottom should be similar in length. If the price were to rise too quickly from the low to the prior peak, the strength of the chart pattern would be diminished. This does not mean that they must be equal, but the trend should illustrate a cup shape on the chart.
The way in which the price moves from peak to low and from low to second peak may cause some confusion as the long-term nature of the pattern can display several different price movements. The price movement does not necessarily move in a straight line but will often have many ups and downs. However, the general direction of the price movement (either up or down) is important, depending on the stage of the pattern.
Volume is one of the most important confirming measures for this pattern where volume should be high at the initial peak (or start of the pattern) and weaken as the price movement heads toward the low. As the price moves away from the low to the price level set by the initial peak, volume should be rising.
Breakouts in chart patterns should be accompanied by a large increase in volume, which helps to strengthen the signal formed by the breakout. Once the price moves above the peak that was established at the start of the chart pattern, the downward trend is considered to have reversed and a buy signal is formed.
By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com
Analyzing Chart Patterns: Round Bottoms
A rounding bottom, also referred to as a saucer bottom, is a long-term reversal pattern that signals a shift from a downtrend to an uptrend. This pattern is traditionally thought to last anywhere from several months to several years. Due to the long-term look of these patterns and their components, the signal and construct of these patterns are more difficult to identify than other reversal patterns.
A rounding-bottom pattern looks similar to a cup and handle, but without the handle. The basic formation of a rounding bottom comes from a downward price movement to a low, followed by a rise from the low back to the start of the downward price movement - forming what looks like a rounded bottom.
The pattern should be preceded by a downtrend but will sometimes be preceded by a sideways price movement that formed after a downward trend. The start of the rounding bottom (its left side) is usually caused by a peak in the downward trend followed by a long price descent to a new long-term low.
Figure: Rounding bottom (saucer bottom) reversal
The time distance from the initial peak to the long-term low is considered to be half the distance of the rounding bottom. This helps to give chartists an idea to as to how long the chart pattern will last or when the pattern is expected to be complete, with a breakout to the upside. For example, if the first half of the pattern is one year, then the signal will not be formed until around a year later.
In terms of the chart pattern's quality, the two stages of the rounding bottom should be similar in length. If the price were to rise too quickly from the low to the prior peak, the strength of the chart pattern would be diminished. This does not mean that they must be equal, but the trend should illustrate a cup shape on the chart.
The way in which the price moves from peak to low and from low to second peak may cause some confusion as the long-term nature of the pattern can display several different price movements. The price movement does not necessarily move in a straight line but will often have many ups and downs. However, the general direction of the price movement (either up or down) is important, depending on the stage of the pattern.
Volume is one of the most important confirming measures for this pattern where volume should be high at the initial peak (or start of the pattern) and weaken as the price movement heads toward the low. As the price moves away from the low to the price level set by the initial peak, volume should be rising.
Breakouts in chart patterns should be accompanied by a large increase in volume, which helps to strengthen the signal formed by the breakout. Once the price moves above the peak that was established at the start of the chart pattern, the downward trend is considered to have reversed and a buy signal is formed.
By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com
Figure: Rounding bottom (saucer bottom) reversal
The time distance from the initial peak to the long-term low is considered to be half the distance of the rounding bottom. This helps to give chartists an idea to as to how long the chart pattern will last or when the pattern is expected to be complete, with a breakout to the upside. For example, if the first half of the pattern is one year, then the signal will not be formed until around a year later.
In terms of the chart pattern's quality, the two stages of the rounding bottom should be similar in length. If the price were to rise too quickly from the low to the prior peak, the strength of the chart pattern would be diminished. This does not mean that they must be equal, but the trend should illustrate a cup shape on the chart.
The way in which the price moves from peak to low and from low to second peak may cause some confusion as the long-term nature of the pattern can display several different price movements. The price movement does not necessarily move in a straight line but will often have many ups and downs. However, the general direction of the price movement (either up or down) is important, depending on the stage of the pattern.
Volume is one of the most important confirming measures for this pattern where volume should be high at the initial peak (or start of the pattern) and weaken as the price movement heads toward the low. As the price moves away from the low to the price level set by the initial peak, volume should be rising.
Breakouts in chart patterns should be accompanied by a large increase in volume, which helps to strengthen the signal formed by the breakout. Once the price moves above the peak that was established at the start of the chart pattern, the downward trend is considered to have reversed and a buy signal is formed.
By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com
Analyzing Chart Patterns: Triple Tops And Bottoms
The triple top and triple bottom are reversal patterns that are formulated when a security attempts to move past a key level of support or resistance in the direction of the prevailing trend.
This chart pattern represents the market's attempt to move a security in a certain direction. After three failed attempts, the buyers (in the case of a top) or sellers (in the case of a bottom) give up, and the opposing group in the market takes a hold of the security, sending it downward (sellers) or upward (buyers).
Triple Top
This bearish reversal pattern is formed when a security that is trending upward tests a similar level of resistance three times without breaking through. Each time the security tests the resistance level, it falls to a similar area of support. After the third fall to the support level, the pattern is complete when the security falls through the support; the price is then expected to move in a downward trend.
Figure 1: Triple top reversal
The first step in this pattern is the creation of a new high in an uptrend that is stalled by selling pressure, which forms a level of resistance. The selling pressure causes the price to fall until it finds a level of support, as buyers move back into the security. The buying pressure sends the price back up to the area of resistance the security previously met. Again, the sellers enter the market and send the security back down to the support level.
This up-and-down movement is repeated for the third time; but this time the buyers, after failing three times, give up on the security, and the sellers take over. Upon falling through the level of support, the security is expected to trend downward.
This pattern can be difficult to spot in the early stages as it will initially look like a double-top pattern, which was discussed in a previous section. The most important thing here is that one waits for the price to move past the level of resistance before entering the security, as the security could actually just end up being range-bound, where it trades between the two levels for some time.
In the triple-top formation, each test of resistance at the upper end should be marked with declining volume at each successive peak. And again, when the price breaks below the support level, it should be accompanied by high volume.
Once the signal is formed, the price objective is based on the size of the chart pattern or the price distance between the level of resistance and support. This is then deducted from the breakout point.
Triple Bottom
This bullish reversal pattern has all of the same attributes as the triple top but signals a reversal of a downward trend. The triple-bottom pattern illustrates a security that is trading in a downtrend and attempts to fall through a level of support three times, each time moving back to a level of resistance. After the third attempt to push the price lower, the pattern is complete when the price moves above the resistance level and begins trading in an upward trend.
Figure 2: Triple bottom reversal
This pattern begins by setting a new low in a downtrend, which is followed by a rally to a high. This sets up the range of trading for the triple-bottom pattern. After hitting the high, the price again comes under selling pressure, which sends it back down to the previous low. Buyers again move back into the security at this support level, sending the price back up again, usually to the previous high.
This is repeated a third time, but after failing again to move to a new low, the pattern is complete when the security moves above the resistance level to begin trading in an uptrend.
In this pattern, volume plays a role similar to the triple top, declining at each trough as it tests the support level, which is a sign of diminishing selling pressure. Again, volume should be high on a breakout above the resistance level on the completion of the pattern.
The price objective will also initially be calculated as the distance of the chart pattern added to the price breakout. So if the chart pattern is formed between $50 and $30 at a price breakout of $50 the price objective is $70 ($50+$20).
Meaning Behind Triple Tops and Bottoms
The significance of these two formations is that an established trend has hit a major section of support/resistance, which stops the trend's ability to continue. This is an indication that the buying or selling pressure that is supporting the trend is beginning to weaken. It also is an indication that the opposite pressure is gaining strength.
The chart pattern is signaling that there is a shift in the supply and demand of the security and of the balance between buyers and sellers. When a reversal signal is formed in a triple top, there is a shift from buyers moving the security upward to sellers moving the security downward.
By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com
Figure 1: Triple top reversal
The first step in this pattern is the creation of a new high in an uptrend that is stalled by selling pressure, which forms a level of resistance. The selling pressure causes the price to fall until it finds a level of support, as buyers move back into the security. The buying pressure sends the price back up to the area of resistance the security previously met. Again, the sellers enter the market and send the security back down to the support level.
This up-and-down movement is repeated for the third time; but this time the buyers, after failing three times, give up on the security, and the sellers take over. Upon falling through the level of support, the security is expected to trend downward.
This pattern can be difficult to spot in the early stages as it will initially look like a double-top pattern, which was discussed in a previous section. The most important thing here is that one waits for the price to move past the level of resistance before entering the security, as the security could actually just end up being range-bound, where it trades between the two levels for some time.
In the triple-top formation, each test of resistance at the upper end should be marked with declining volume at each successive peak. And again, when the price breaks below the support level, it should be accompanied by high volume.
Once the signal is formed, the price objective is based on the size of the chart pattern or the price distance between the level of resistance and support. This is then deducted from the breakout point.
Triple Bottom
This bullish reversal pattern has all of the same attributes as the triple top but signals a reversal of a downward trend. The triple-bottom pattern illustrates a security that is trading in a downtrend and attempts to fall through a level of support three times, each time moving back to a level of resistance. After the third attempt to push the price lower, the pattern is complete when the price moves above the resistance level and begins trading in an upward trend.
Figure 2: Triple bottom reversal
This pattern begins by setting a new low in a downtrend, which is followed by a rally to a high. This sets up the range of trading for the triple-bottom pattern. After hitting the high, the price again comes under selling pressure, which sends it back down to the previous low. Buyers again move back into the security at this support level, sending the price back up again, usually to the previous high.
This is repeated a third time, but after failing again to move to a new low, the pattern is complete when the security moves above the resistance level to begin trading in an uptrend.
In this pattern, volume plays a role similar to the triple top, declining at each trough as it tests the support level, which is a sign of diminishing selling pressure. Again, volume should be high on a breakout above the resistance level on the completion of the pattern.
The price objective will also initially be calculated as the distance of the chart pattern added to the price breakout. So if the chart pattern is formed between $50 and $30 at a price breakout of $50 the price objective is $70 ($50+$20).
Meaning Behind Triple Tops and Bottoms
The significance of these two formations is that an established trend has hit a major section of support/resistance, which stops the trend's ability to continue. This is an indication that the buying or selling pressure that is supporting the trend is beginning to weaken. It also is an indication that the opposite pressure is gaining strength.
The chart pattern is signaling that there is a shift in the supply and demand of the security and of the balance between buyers and sellers. When a reversal signal is formed in a triple top, there is a shift from buyers moving the security upward to sellers moving the security downward.
By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com
Analyzing Chart Patterns: The Wedge
The wedge chart pattern signals a reverse of the trend that is currently formed within the wedge itself. Wedges are similar in construction to a symmetrical triangle in that there are two trendlines - support and resistance - which band the price of a security.
The wedge pattern differs in that it is generally a longer-term pattern, usually lasting three to six months. It also has converging trendlines that slant in an either upward or downward direction, which differs from the more uniform trendlines of triangles.
There are two main types of wedges – falling and rising – which differ on the overall slant of the pattern. A falling wedge slopes downward, while a rising wedge slants upward.
Falling Wedge
The falling wedge is a generally bullish pattern signaling that one will likely see the price break upwards through the wedge and move into an uptrend. The trendlines of this pattern converge, with both being slanted in a downward direction as the price is trading in a downtrend.
Figure 1: Falling wedge pattern
From the above, one can see that a wedge is similar to the triangles, in that the price movement bounces between the two trendlines, which are bounding the price movement.
Another thing to look at in the falling wedge is that the upper (or resistance) trendline should have a sharper slope than the support level in the wedge construction. When the lower (or support) trendline is clearly flatter as the pattern forms, it signals that selling pressure is waning, as sellers have trouble pushing the price down further each time the security is under pressure.
The price movement in the wedge should at minimum test both the support trendline and the resistance trendline twice during the life of the wedge. The more times it tests each level, especially on the resistance end, the higher quality the wedge pattern is thought to be.
The buy signal is formed when the price breaks through the upper resistance line. This breakout move should be on heavier volume, but due to the longer-term nature of this pattern, it's important that the price has successive closes above the resistance line.
Rising Wedge
Conversely, a rising wedge is a bearish pattern that signals that the security is likely to head in a downward direction. The trendlines of this pattern converge, with both trendlines slanted in an upward direction.
Figure 2: Rising wedge pattern
Again, the price movement is bounded by the two converging trendlines. As the price moves towards the apex of the pattern, momentum is weakening. A move below the lower support would be viewed by traders as a reversal in the upward trend.
As the strength of the buyers weakens (exhibited by their inability to take the price higher), the sellers start to gain momentum. The pattern is complete, with the sellers taking control of the security, when the price falls below the supporting trendline.
By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com
Figure 1: Falling wedge pattern
From the above, one can see that a wedge is similar to the triangles, in that the price movement bounces between the two trendlines, which are bounding the price movement.
Another thing to look at in the falling wedge is that the upper (or resistance) trendline should have a sharper slope than the support level in the wedge construction. When the lower (or support) trendline is clearly flatter as the pattern forms, it signals that selling pressure is waning, as sellers have trouble pushing the price down further each time the security is under pressure.
The price movement in the wedge should at minimum test both the support trendline and the resistance trendline twice during the life of the wedge. The more times it tests each level, especially on the resistance end, the higher quality the wedge pattern is thought to be.
The buy signal is formed when the price breaks through the upper resistance line. This breakout move should be on heavier volume, but due to the longer-term nature of this pattern, it's important that the price has successive closes above the resistance line.
Rising Wedge
Conversely, a rising wedge is a bearish pattern that signals that the security is likely to head in a downward direction. The trendlines of this pattern converge, with both trendlines slanted in an upward direction.
Figure 2: Rising wedge pattern
Again, the price movement is bounded by the two converging trendlines. As the price moves towards the apex of the pattern, momentum is weakening. A move below the lower support would be viewed by traders as a reversal in the upward trend.
As the strength of the buyers weakens (exhibited by their inability to take the price higher), the sellers start to gain momentum. The pattern is complete, with the sellers taking control of the security, when the price falls below the supporting trendline.
By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com
Analyzing Chart Patterns: Flags And Pennants
The flag and pennant patterns are two continuation patterns that closely resemble each other, differing only in their shape during the pattern's consolidation period. This is the reason the terms flag and pennant are often used interchangeably. A flag is a rectangular shape, while the pennant looks more like a triangle.
These two patterns are formed when there is a sharp price movement followed by generally sideways price movement, which is the flag or pennant. The pattern is complete when there is a price breakout in the same direction of the initial sharp price movement. The following move will see a similarly sharp move in the same direction as the prior sharp move. The complete move of the chart pattern - from the first sharp move to the last sharp move - is referred to as the flag pole.
The flag or pennant is considered to be flying at half-mast, as the distance of the initial price movement is thought to be roughly equal to the proceeding price move. The reason these patterns form is that after a large price movement, the market consolidates, or pauses, before resuming the initial trend.
The Flag
The flag pattern forms what looks like a rectangle. The rectangle is formed by two parallel trendlines that act as support and resistance for the price until the price breaks out. In general, the flag will not be perfectly flat but will have its trendlines sloping.
Figure 1: The flag pattern
In general, the slope of the flag should move in the opposite direction of the initial sharp price movement; so if the initial movement were up, the flag should be downward sloping.
The buy or sell signal is formed once the price breaks through the support or resistance level, with the trend continuing in the prior direction. This breakthrough should be on heavier volume to improve the signal of the chart pattern.
The Pennant
The pennant forms what looks like a symmetrical triangle, where the support and resistance trendlines converge towards each other. The pennant pattern does not need to follow the same rules found in triangles, where they should test each support or resistance line several times. Also, the direction of the pennant is not as important as it is in the flag; however, the pennant is generally flat.
Figure 2: The Pennant
General Ideas
While the construct of the pause in the trend is different for the flag and pennant, the attributes of the chart patterns themselves are similar. It is vital that the price movement prior to the flag or pennant be a strong, sharp move.
Typically, these patterns take less time to form during downtrends than in uptrends. In terms of pattern length, they are generally short-term patterns lasting one to three weeks, but can be formed over longer periods.
The volume, as with most breakout signals, should be seen as strong during the breakout to confirm the signal. Upon breakout, the initial price objective is equal to the distance of the prior move added to the breakout point. For example, if a prior sharp up movement was from $30 to $40, then the resulting price objective from a price breakout of $38 would be $48 ($38+$10).
By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com
Figure 1: The flag pattern
In general, the slope of the flag should move in the opposite direction of the initial sharp price movement; so if the initial movement were up, the flag should be downward sloping.
The buy or sell signal is formed once the price breaks through the support or resistance level, with the trend continuing in the prior direction. This breakthrough should be on heavier volume to improve the signal of the chart pattern.
The Pennant
The pennant forms what looks like a symmetrical triangle, where the support and resistance trendlines converge towards each other. The pennant pattern does not need to follow the same rules found in triangles, where they should test each support or resistance line several times. Also, the direction of the pennant is not as important as it is in the flag; however, the pennant is generally flat.
Figure 2: The Pennant
General Ideas
While the construct of the pause in the trend is different for the flag and pennant, the attributes of the chart patterns themselves are similar. It is vital that the price movement prior to the flag or pennant be a strong, sharp move.
Typically, these patterns take less time to form during downtrends than in uptrends. In terms of pattern length, they are generally short-term patterns lasting one to three weeks, but can be formed over longer periods.
The volume, as with most breakout signals, should be seen as strong during the breakout to confirm the signal. Upon breakout, the initial price objective is equal to the distance of the prior move added to the breakout point. For example, if a prior sharp up movement was from $30 to $40, then the resulting price objective from a price breakout of $38 would be $48 ($38+$10).
By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com
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