CHART AND PATTERNS IN TECHNICAL ANALYSIS

Technical analysis of financial markets relies heavily on chart patterns, which provide visual
representations of price movements over time. These patterns help traders identify potential
areas of support and resistance, and signal either reversals or continuations in trends.
Understanding these patterns is key to making informed trading decisions.
Support and Resistance
Support and resistance are fundamental concepts in technical analysis. Support refers to a
price level where a falling asset tends to find buying interest, preventing further decline.
Conversely, resistance is a price level where an asset faces selling pressure, capping its rise.
Support Levels: Formed when demand exceeds supply at a specific price, often marked by
prior lows.
Support is a price level where the falling price tends to slow down or reverse. This means
the price is more likely to “bounce” off this level rather than break through it. However, once
the price has passed this level, it will likely continue dropping until it finds another support
level.
 Resistance Levels: Created when supply surpasses demand, typically seen at prior
highs.
Resistance is a price level where rising prices slow down or reverse. The price will likely
bounce back from this level rather than a breakthrough. However, a break above this level
opens further price growth until it finds another resistance level.
These levels are not absolute but zones where price action often reacts. Traders use them
to determine entry and exit points, setting stop-loss orders just below support or above
resistance.

Reversal Patterns
Reversal patterns indicate a potential change in the direction of a prevailing trend. Two
prominent examples are the Head and Shoulders and the Inverse Head and Shoulders
formations.
Head and Shoulders Formation
This pattern signals a bearish reversal in an uptrend. It consists of:
 A left shoulder: A peak followed by a retracement (Retracement is a temporary change
in the direction of an asset's price movement, which goes against the established
trend. After a retracement, the price will eventually return to continue the overall trend.)
 A head: A higher peak followed by another retracement.
 A right shoulder: A lower peak than the head, followed by a breakdown below the
neckline (support).
When the price breaks the neckline, it often signifies the start of a downtrend. The distance
between the head and neckline is used to project the target price.
The neckline is a critical level in chart patterns, particularly in Head and Shoulders
and Inverse Head and Shoulders formations. It acts as a reference line for identifying
breakouts or confirming pattern completion.

Inverse Head and Shoulders Formation

The inverse of the above pattern, this signals a bullish reversal during a downtrend. It consists
of:
 A left shoulder: A trough followed by a retracement.
 A head: A deeper trough followed by another retracement.
 A right shoulder: A shallower trough, with a breakout above the neckline indicating
the start of an uptrend.
Continuous Patterns
Continuous patterns, or consolidation patterns, suggest that the prevailing trend will resume
after a temporary pause. Examples include Triangles, Flags, and Pennants.
Triangle Patterns
Triangle patterns form when price converges within two trendlines. There are three types:
 Ascending Triangle: Bullish continuation pattern where the upper trendline is flat, and
the lower trendline slopes upward.
 Descending Triangle: Bearish continuation pattern with a flat lower trendline and a
downward-sloping upper trendline.
 Symmetrical Triangle: Neutral pattern where both trendlines converge, signaling a
breakout in either direction.
Triangle Patterns
 A triangle pattern forms when a stock’s trading range narrows following an uptrend or
downtrend, usually indicating a consolidation, accumulation, or distribution before a
continuation or reversal.
 Triangle patterns come in three varieties – ascending, descending, and symmetrical –
although all three types of triangles are interpreted similarly.
 Ascending and Descending Triangles
 Ascending and descending triangle patterns are right-angle triangles in that the line
extending along two or more lows or two or more highs, respectively, is horizontal.
Ascending triangles have a rising lower trendline as a result of accumulation and are
always considered bullish signals regardless of whether they form after an uptrend or
downtrend. Descending triangles have a falling upper trendline as a result of distribution
and are always considered bearish signals.
  Symmetrical Triangles
Symmetrical triangles have descending highs and ascending lows such that both the upper
and lower trendlines are angled towards the triangle’s apex. Symmetrical triangles are a
sign of consolidation and usually result in a continuation of the prior trend, although they
can also indicate reversals.

Flags and Pennants

A pennant is a continuation pattern that forms when there is a brief consolidation period
following a significant price movement. The pattern resembles a small symmetrical triangle,
formed by two converging trend lines. These lines meet at a point called the apex. Pennants
typically form after a strong price move, known as the flagpole, and are characterized by
decreasing volume as the pattern develops.
A flag pattern is another continuation pattern, but unlike the pennant, it forms a rectangle shape
on the chart. Flags develop after a sharp price movement, creating a flagpole, followed by a
consolidation period where the price moves sideways or slightly against the prevailing trend.
This consolidation forms the flag portion, which is often accompanied by decreasing volume.

Flags and pennants occur after sharp price movements (flagpoles):

 Flags: Rectangular patterns that slope against the prevailing trend.
 Pennants: Small symmetrical triangles that indicate consolidation before continuation.
Both patterns are resolved when price breaks in the direction of the prior trend.
Elliott Wave Theory

Elliott Wave Theory, developed by Ralph Nelson Elliott, proposes that market prices move in
repetitive cycles driven by investor psychology. It identifies two types of waves:

Elliot Wave Theory revolves around the concept of fractals—structures that are self-similar
at different scales and timeframes. Market trends often form a wave structure, which consists
of two primary types: impulsive waves and corrective waves.
The theory is based on a 5-3 wave structure: five waves that move in the direction of the overall
trend, followed by three waves that correct this movement.
Impulsive Move / Uptrend: These waves follow the main trend and consist of five sub-waves,
labeled 1 – 5. Within the five trend-following waves, the price forms three impulsive and 2
corrective waves.
 1.
1. Impulsive waves: Trend waves that push the price higher in the ongoing uptrend.
Impulsive waves are longer and stronger than corrective waves.
2. Corrective waves: Shorter waves that go against the ongoing trend direction.
Corrective Move / Downtrend: These counter the primary trend and are typically made up
of three waves, labeled A-B-C. The start of the corrective move is confirmed when the first
wave breaks below the low of a previous impulsive wave.
 Impulse Waves (5 waves): Follow the main trend, consisting of three advancing waves
(1, 3, 5) and two corrective waves (2, 4).
 Corrective Waves (3 waves): Move against the trend, labeled as A, B, and C.
These patterns occur on all timeframes, helping traders predict future market movements. The
theory emphasizes fractals, meaning patterns are self-similar across different scales.

OTHER RELEVANT PATTERNS

Double Tops and Double Bottoms
Double Tops: Bearish reversal pattern formed by two peaks at approximately the same level,
with a breakdown below the neckline.
 A double top is a reversal pattern that is formed after there is an extended move up.
 The “tops” are peaks that are formed when the price hits a certain level that can’t be
broken.
 After hitting this level, the price will bounce off it slightly, but then return back to test
the level again.
 If the price bounces off of that level again, then you have a DOUBLE top!

The neckline is a critical level in chart patterns, particularly in Head and Shoulders and
Inverse Head and Shoulders formations. It acts as a reference line for identifying breakouts
or confirming pattern completion.
 Double Bottoms: Bullish reversal pattern with two troughs at similar levels, followed
by a breakout above the neckline.
  The double bottom is also a trend reversal formation, but this time we are looking to
go long instead of short. These formations occur after extended downtrends when two
valleys or “bottoms” have been formed.

Cup and Handle

A bullish continuation pattern where the price forms a "U"-shaped cup followed by a small
consolidation (the handle), before breaking out upward.

Rounding Bottoms
This pattern indicates a gradual reversal from a bearish trend to a bullish trend, characterized
by a smooth, rounded trough.