There are four main types of charts that are used by investors and traders depending on the information

that they
are seeking and their individual skill levels. The chart types are: the line chart, the bar chart, the candlestick chart
and the point and figure chart. In the following sections, we will focus on the S&P 500 Index during the period of
January 2006 through May 2006. Notice how the data used to create the charts is the same, but the way the data
is plotted and shown in the charts is different.

Line Chart
The most basic of the four charts is the line chart because it represents only the closing prices over a set period
of time. The line is formed by connecting the closing prices over the time frame. Line charts do not provide visual
information of the trading range for the individual points such as the high, low and opening prices. However, the
closing price is often considered to be the most important price in stock data compared to the high and low for
the day and this is why it is the only value used in line charts.

Figure 1: A line chart

Bar Charts
The bar chart expands on the line chart by adding several more key pieces of information to each data point. The
chart is made up of a series of vertical lines that represent each data point. This vertical line represents the high
and low for the trading period, along with the closing price. The close and open are represented on the vertical
line by a horizontal dash. The opening price on a bar chart is illustrated by the dash that is located on the left side
of the vertical bar. Conversely, the close is represented by the dash on the right. Generally, if the left dash (open)
is lower than the right dash (close) then the bar will be shaded black, representing an up period for the stock,
which means it has gained value. A bar that is colored red signals that the stock has gone down in value over
that period. When this is the case, the dash on the right (close) is lower than the dash on the left (open).

Figure 2: A bar chart

Candlestick Charts
The candlestick chart is similar to a bar chart, but it differs in the way that it is visually constructed. Similar to the
bar chart, the candlestick also has a thin vertical line showing the period's trading range. The difference comes in
the formation of a wide bar on the vertical line, which illustrates the difference between the open and close. And,
like bar charts, candlesticks also rely heavily on the use of colors to explain what has happened during the
trading period. A major problem with the candlestick color configuration, however, is that different sites use
different standards; therefore, it is important to understand the candlestick configuration used at the chart site you
are working with. There are two color constructs for days up and one for days that the price falls. When the price
of the stock is up and closes above the opening trade, the candlestick will usually be white or clear. If the stock
has traded down for the period, then the candlestick will usually be red or black, depending on the site. If the
stock's price has closed above the previous day’s close but below the day's open, the candlestick will be black or
filled with the color that is used to indicate an up day. (To read more, see The Art Of Candlestick Charting - Part
1, Part 2, Part 3 and Part 4.)

Figure 3: A candlestick chart

Point and Figure Charts

The point and figure chart is not well known or used by the average investor but it has had a long history of use
dating back to the first technical traders. This type of chart reflects price movements and is not as concerned
about time and volume in the formulation of the points. The point and figure chart removes the noise, or
insignificant price movements, in the stock, which can distort traders' views of the price trends. These types of
charts also try to neutralize the skewing effect that time has on chart analysis. (For further reading, see Point And
Figure Charting.)

Figure 4: A point and figure chart

When first looking at a point and figure chart, you will notice a series of Xs and Os. The Xs represent upward
price trends and the Os represent downward price trends. There are also numbers and letters in the chart; these
represent months, and give investors an idea of the date. Each box on the chart represents the price scale, which
adjusts depending on the price of the stock: the higher the stock's price the more each box represents. On most
charts where the price is between $20 and $100, a box represents $1, or 1 point for the stock. The other critical
point of a point and figure chart is the reversal criteria. This is usually set at three but it can also be set according
to the chartist's discretion. The reversal criteria set how much the price has to move away from the high or low in
the price trend to create a new trend or, in other words, how much the price has to move in order for a column of
Xs to become a column of Os, or vice versa. When the price trend has moved from one trend to another, it shifts
to the right, signaling a trend change.

Patterns of technical analyses

support/resistance

The support/resistance of an identified level, whether discovered with a trendline or through any other
method, is deemed to be stronger the more times that the price has historically been unable to move
beyond it. Many technical traders will use their identified support and resistance levels to choose
strategic entry/exit prices because these areas often represent the prices that are the most influential
to an asset's direction. Most traders are confident at these levels in the underlying value of the asset
so the volume generally increases more than usual, making it much more difficult for traders to
continue driving the price higher or lower.

Moving Averages
Most technical traders incorporate the power of various technical indicators, such as moving
averages, to aid in predicting future short-term momentum, but these traders never fully realize the
ability these tools have for identifying levels of support and resistance. As you can see from the chart
below, a moving average is a constantly changing line that smooths out past price data while also
allowing the trader to identify support and resistance. Notice how the price of the asset finds support
at the moving average when the trend is up, and how it acts as resistance when the trend is down.
Most traders will experiment with different time periods in their moving averages so that they can find
the one that works best for this specific task. (To read more, see Exploring Oscillators And Indicators
and Trading Psychology And Technical Indicators.)  
Head and Shoulders 
This is one of the most popular and reliable chart patterns in technical analysis. Head and shoulders is a reversal
chart pattern that when formed, signals that the security is likely to move against the previous trend. As you can
see in Figure 1, there are two versions of the head and shoulders chart pattern. Head and shoulders top (shown
on the left) is a chart pattern that is formed at the high of an upward movement and signals that the upward trend
is about to end. Head and shoulders bottom, also known as inverse head and shoulders (shown on the right) is
the lesser known of the two, but is used to signal a reversal in a downtrend.

Figure 1: Head and shoulders top is shown on the left. Head and shoulders bottom, or inverse
head and shoulders, is on the right.

Both of these head and shoulders patterns are similar in that there are four main parts: two shoulders, a head
and a neckline. Also, each individual head and shoulder is comprised of a high and a low. For example, in the
head and shoulders top image shown on the left side in Figure 1, the left shoulder is made up of a high followed
by a low. In this pattern, the neckline is a level of support or resistance. Remember that an upward trend is a
period of successive rising highs and rising lows. The head and shoulders chart pattern, therefore, illustrates a
weakening in a trend by showing the deterioration in the successive movements of the highs and lows. (To learn
more, see Price Patterns - Part 2.)

Cup and Handle

A cup and handle chart is a bullish continuation pattern in which the upward trend has paused but will continue in
an upward direction once the pattern is confirmed.

Figure 2

As you can see in Figure 2, this price pattern forms what looks like a cup, which is preceded by an upward trend.
The handle follows the cup formation and is formed by a generally downward/sideways movement in the
security's price. Once the price movement pushes above the resistance lines formed in the handle, the upward
trend can continue. There is a wide ranging time frame for this type of pattern, with the span ranging from several
months to more than a year.

Double Tops and Bottoms

This chart pattern is another well-known pattern that signals a trend reversal - it is considered to be one of the
most reliable and is commonly used. These patterns are formed after a sustained trend and signal to chartists
that the trend is about to reverse. The pattern is created when a price movement tests support or resistance
levels twice and is unable to break through. This pattern is often used to signal intermediate and long-term trend
reversals.

Figure 3: A double top pattern is shown on the left, while a double bottom pattern is shown on the
right.

In the case of the double top pattern in Figure 3, the price movement has twice tried to move above a certain
price level. After two unsuccessful attempts at pushing the price higher, the trend reverses and the price heads
lower. In the case of a double bottom (shown on the right), the price movement has tried to go lower twice, but
has found support each time. After the second bounce off of the support, the security enters a new trend and
heads upward. (For more in-depth reading, see The Memory Of Price and Price Patterns - Part 4.)

Triangles
Triangles are some of the most well-known chart patterns used in technical analysis. The three types of triangles,
which vary in construct and implication, are the symmetrical triangle, ascending and descending triangle. These
chart patterns are considered to last anywhere from a couple of weeks to several months.
 Figure 4

The symmetrical triangle in Figure 4 is a pattern in which two trendlines converge toward each other. This pattern
is neutral in that a breakout to the upside or downside is a confirmation of a trend in that direction. In an
ascending triangle, the upper trendline is flat, while the bottom trendline is upward sloping. This is generally
thought of as a bullish pattern in which chartists look for an upside breakout. In a descending triangle, the lower
trendline is flat and the upper trendline is descending. This is generally seen as a bearish pattern where chartists
look for a downside breakout.

Flag and Pennant

These two short-term chart patterns are continuation patterns that are formed when there is a sharp price
movement followed by a generally sideways price movement. This pattern is then completed upon another sharp
price movement in the same direction as the move that started the trend. The patterns are generally thought to
last from one to three weeks.

Figure 5

As you can see in Figure 5, there is little difference between a pennant and a flag. The main difference between
these price movements can be seen in the middle section of the chart pattern. In a pennant, the middle section is
characterized by converging trendlines, much like what is seen in a symmetrical triangle. The middle section on
the flag pattern, on the other hand, shows a channel pattern, with no convergence between the trendlines. In
both cases, the trend is expected to continue when the price moves above the upper trendline.
Wedge
The wedge chart pattern can be either a continuation or reversal pattern. It is similar to a symmetrical triangle
except that the wedge pattern slants in an upward or downward direction, while the symmetrical triangle
generally shows a sideways movement. The other difference is that wedges tend to form over longer periods,
usually between three and six months.

Figure 6

The fact that wedges are classified as both continuation and reversal patterns can make reading signals
confusing. However, at the most basic level, a falling wedge is bullish and a rising wedge is bearish. In Figure 6,
we have a falling wedge in which two trendlines are converging in a downward direction. If the price was to rise
above the upper trendline, it would form a continuation pattern, while a move below the lower trendline would
signal a reversal pattern.

Gaps
A gap in a chart is an empty space between a trading period and the following trading period. This occurs when
there is a large difference in prices between two sequential trading periods. For example, if the trading range in
one period is between $25 and $30 and the next trading period opens at $40, there will be a large gap on the
chart between these two periods. Gap price movements can be found on bar charts and candlestick charts but
will not be found on point and figure or basic line charts. Gaps generally show that something of significance has
happened in the security, such as a better-than-expected earnings announcement.

There are three main types of gaps, breakaway, runaway (measuring) and exhaustion. A breakaway gap forms
at the start of a trend, a runaway gap forms during the middle of a trend and an exhaustion gap forms near the
end of a trend. (For more insight, read Playing The Gap.)

Triple Tops and Bottoms

Triple tops and triple bottoms are another type of reversal chart pattern in chart analysis. These are not as
prevalent in charts as head and shoulders and double tops and bottoms, but they act in a similar fashion. These
two chart patterns are formed when the price movement tests a level of support or resistance three times and is
unable to break through; this signals a reversal of the prior trend.
 Figure 7

Confusion can form with triple tops and bottoms during the formation of the pattern because they can look similar
to other chart patterns. After the first two support/resistance tests are formed in the price movement, the pattern
will look like a double top or bottom, which could lead a chartist to enter a reversal position too soon.

Rounding Bottom
A rounding bottom, also referred to as a saucer bottom, is a long-term reversal pattern that signals a shift from a
downward trend to an upward trend. This pattern is traditionally thought to last anywhere from several months to
several years.

Figure 8

A rounding bottom chart pattern looks similar to a cup and handle pattern but without the handle. The long-term
nature of this pattern and the lack of a confirmation trigger, such as the handle in the cup and handle, makes it a
difficult pattern to trade.

We have finished our look at some of the more popular chart patterns. You should now be able to recognize each
chart pattern as well the signal it can form for chartists. We will now move on to other technical techniques and
examin

HEAD AND SHOULDERS AS A REVERSAL PATTERN IN AN

UPTREND (BEARISH)
DP / Diagnostic Products Corp.
 Before After

'After' shot / Head and Shoulders

'Before' shot / Head and Shoulders
Pattern breakout on 9/13/01, low
Pattern spotted on 11/9/01
on 9/15/01
In this example I show a 'before' view and the subsequent 'after' view. I
have found the head and shoulders pattern to be one of the most reliable
patterns to trade. 

What's interesting is that this pattern was spotted on 11/9/01

('before' chart), two days before the dramatic sell-off. It was
published and sent to subscribers in chartpatterns.com's
Pattern Recognition Services Weekly Newsletter. To get
alerted to high probability patterns like these and others you
see on this site, simply subscribe to the Pattern Recognition
Services Newsletter and have approximately 20-25 patterns
sent to you every Sunday so you'll know what's hot and what's
not for the coming week. 

ESI Offers
e how they are used by technical traders to gauge price movements.

Great Example of Cup & Handle Pattern

Written by Blain on February 12, 2009. Tagged Stocks: ESI

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in Share

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ITT Educational Services (ESI) successfully broke out of a cup and handle pattern in January
that was almost picture perfect. With the stock holding up at higher levels ESI makes for a
great addition to our stock chart education archives.

The Cup and Handle pattern was made popular by William O’Neil of Investors Business
Daily. It is an integral part of the CANSLIM Style of trading and is very often found during
bull markets.

For this stock chart of ESI first take note that it is a weekly chart showing the last two years
of trade history. Next look at the Grey #1 and follow the line to see a raw outline of the Cup
and Handle pattern leading up to the proper buypoint at Grey #5. This is what we are
focusing on.

1. The Cup and Handle Formation – By following the Grey line a general outline of a cup
and handle can be seen. Note this pattern took over a year to form in its entirety.

2. Volume increases on the back end of the cup – After bottoming a strong rally should
take place with several key accumulation volume weeks. Heavy volume, the number of
shares traded per day, tells us that institutions were buying into the rally and gives the stock
new life. ESI peaked out at $106.75 before beginning its formation of the handle.

3. Uncertain investors are shaken out to begin forming the handle -Volume increases
naturally as ESI pulls back after its huge rally from $42 to $106. This begins the formation of
the handle and is a key shake out area for investors who were holding the stock “long” way
back when the stock was trading over $100 in mid 2008.

4. Volume declines leading into the breakout – Critical to the pattern volume consistently
declines as the right side of the handle forms. This can be seen as the calm weather just
before the storm. Investors are satisfied with the current prices.

5. ESI breaks out on heavy volume – By looking closely at a daily chart ESI actually failed
its first breakout attempt when it pushed above $92.50 due to lack of volume. But the stock
came storming back to claim higher highs the very next week (first week in January 09) with
surging volume. The stock ran over 40% from here over the next month. Point #5 was the
proper buypoint for this pattern.

6. A new base begins to form – By looking at the red line of resistance we can see that ESI
has found resistance around the $132 price level which is where the stock peaked in in
October 2007. Moving forward ESI will need to form a fresh base over the next several
weeks. Keep close watch as a heavy volume move back above $132 is the next buy point for
investors looking to get in.

More stock chart examples and lessons below.