Technical Analysis 101 : Session 4

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Stanley Yabroff

Val Alekseyev

• Interpreting Trend Lines and Trend Channels
• Chart Patterns
• Classic Chart Interpretation

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Session 4

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.

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Trend Lines

45 Degree Angles

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.

Patterns

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.

Triple & Double Bottoms

Double Tops, Double Bottoms

W - Bottoms

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M - Tops

Double Bottoms

Single Tops, Single Bottoms

V - Bottoms

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V - Tops

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.

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Head and Shoulders

Source: chartpatterns.com

Head & Shoulder Top

Head & Shoulder Bottom

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

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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.

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Triangles

Symmetrical Triangle

• In an uptrend
• Bullish

Symmetrical Triangle

• In Downtrend
• Bearish

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.

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Triangles

Ascending Triangle

• In an uptrend
• Bullish

Descending Triangle

• In a Downtrend
• Bearish

Source: chartpatterns.com

Source: chartpatterns.com

Triangles

Ascending Triangle

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.

Triangles

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.

Flags & Pennants

Source: chartpatterns.com

Island Bottom

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.

Bottom Basing / Congestion

Gaps

Val Alekseyev

valekseyev@cqg.com

Stan Yabroff

stan@cqg.com

1 800-525-7082 www.cqg.com