An inverted dead cat bounce is quite the opposite of the dead cat bounce. A quick look is if a trader owns a stock following a quick and large (5-20%) gain there is normally a gap up. If you sell on the next day after the gap up day, thus unlocking profits its because prices normally start falling before beginning a new move upward (Bulkowski, 2005).

The inverted dead cat bounce will occur when a company discloses news that will send the stock soaring by 5% to 20% or perhaps even higher. This event isn’t caused by takeover news since that event pattern indicates a stock moving up and staying up. Instead, the inverted dead cat bounce is frequently earnings related or because of positive results from clinical drug trials, patent dispute resolutions, legal awards, contract wins, oil patch discoveries, etc..

After a price spikes upward, it will often drop back down inside a week or two.

A frequency distribution of price momentum over time conveys that less than half the stocks will make a higher high the day after the announcement. But you are able to place a limit order to sell at the prior day’s high and see if it hits. You’ll want to day trade the exit, if possible, to maximize your profits.

Flags and Pennants are categorized as a continuous pattern. They normally represent only brief pauses in a dynamic stock. They’re typically seen immediately after a quick move. The stock will then take off again in the same direction. Research shows that these patterns are many of the most reliable continuation patterns. Take a look at typical Flag and Pennant pattern.

Bullish flags are identified with lower tops and lower bottoms, and with the pattern slanting against the trend. However unlike wedges, their trend lines run parallel.

Bearish flags are made up of higher tops and higher bottoms. Bear flags will also have a inclination to slope against the trend. Their trend lines run parallel as well.

Pennants look a lot like a symmetrical triangle. However pennants are normally smaller in size (volatility) and duration. Volume in most cases contracts during the pause with an increase on the breakout.

HERE IS A SAMPLE CHART WITH A FLAG & PENNANT PATTERN

The V top is a reverse V-shaped top thus the name. The top is quite sharp. It’s due to the irrationality of actors leading to a steep increase that will be corrected shortly afterwards. The V top will occur most often in an upward trend and will often signal a trend reversal. It can also appear in a downward trend, like when in an economic announcement.

The neckline of the pattern is formulated by the lowest point before the formation of the reverse V.

The general objective of the V Top pattern is the distance between the neckline and the lowest of the reverse V that extended to the neckline.

Various criteria is used to identify a V top:

– The highest point of the reverse V is often formulated by a single candle, often with a long upper shadow that underlines the reversal willingness of investors.

– The sharp upward movement that forms the reverse V is led by a steep upward slant. The price will make any pause during the bullish movement.

– The angle of the line that leads the bearish reversal should be similar to the angle of the line that led the bullish downtrend.

– It is quite difficult to anticipate a V top.

– The interest of the pattern is in its reversal potential.

– The V top will often appear in a channel.

The V bottom is shaped like a V thus the name. The dip will be quite sharp. It’s because the irrationality of actors leading to a steep fall which will be corrected shortly after. The V bottom will occur most often in a downward trend and will generally  offer a signal trend reversal. It can also appear in an upward trend (like in an economic announcement).

The neckline of the pattern is formed by the uppermost point prior to the formation of the V.

Here are several criteria that are used to identify a V bottom:

– The lowest point of the V bottom is often formed by a single candle, often with a long lower shadow which underlines the reversal willingness of investors.

– The sharp downward movement that forms the V is guided by a very steep downward slant. The price will often make a pause during the bearish movement.

– The shape of the line that leads the bullish reversal will be nearly identical to the shape of the line that leads the bearish downtrend.

– It is quite difficult to anticipate a V bottom.

– The interest of the pattern is in its reversal potential.

– The V bottom often appears in a channel.

– The upward trend will continue in most cases once the pattern is completed, but in trend.

A horizontal channel is a pattern that underlines investor’s indecisiveness. This horizontal channel is assembled by two horizontal and parallel lines that build the progress of the price. To confirm a line, there should be at least two points of contact with the price. The more contact points it will has, the more these will be durable and their breakout will give an substantial buy/sell signal.

The horizontal channel is a familiar chart pattern. It’s found on every time frame. Central to this channel, buying and selling forces are alike and only the breakout of one of the two bands will show an advantage to one of them.

The abstract objective of the pattern will be calculated by extending the length of the channel on the break point.

Check the graphical representation of a horizontal channel:

The goal price of this pattern is ascertained by its height from the base of the triangle that’s carried over the break point. Try the technique to draw a parallel line to the support of the symmetrical triangle from the first contact point with the resistance which will help obtain a bullish target price.

The more the horizontal channel is long, the more the movement at the exit will remain strong.

Pullbacks are usual.  The breakout will often occur at the 4th contact point.

The descending triangle is a bearish continuation pattern. This pattern forms two converging lines. The initial is a downward slant which resistance and the other is a horizontal support. To validate the descending triangle, there must be oscillation between the two lines. The lines must be touched at least twice for validation.

A graphic representation of an descending triangle follows:

The price of this pattern is decided by its height from the base of the triangle that is carried over the break point. A technique used is to draw a parallel to the support line of the descending triangle from the first contact point with the support

This pattern is difficult to classify. Indeed, the exit is bearish just over half the time. So this is a continuation pattern but may also be a reversal pattern symbolizing a buying accumulation zone. Bullish movements are also more important than downward movements.

Look at these statistics about the descending triangle:

– In 54% of cases, there is a bearish breakout.

– In 54% of cases, the target price can be reached when the support is broken. But when the bearish slant is broken, the percentage goes up to 84%.

– In 64% of cases, a pullback occurs on the support.

Over half the time, when a breakout does occur from the bottom, the exit will be made by the top. However, false breakouts by the top are rare with only 6%.

The exit often occurs at the 2/3 portion of the pattern. This is the output level that offers the best performance.

The target price of the pattern is often reached before the end of the triangle.

False breaks will give no indication on the true side of the exit.

Try to avoid taking a position if the breakout occurs before the 2/3 of the pattern.

Pullbacks can be harmful for the performance of the pattern.

The symmetrical triangle top is a bullish continuation pattern. This pattern forms two trend lines which are symmetrical to the horizontal and convergent. The initial pattern is a bearish slant that gives resistance and the other is a bullish slant that will be the support. To prove a symmetrical triangle top, one must have oscillation between the two lines. Each of these lines must be touched at least twice for validation.

Asymmetrical triangle “top” is necessary for the movement that precedes the formation of the triangle being bullish.

A graphical representation of a symmetrical triangle top is below:

The objected price of this pattern will be determined by its height from the base of the triangle that is carried over the break point. A technique you may use is to draw a parallel line to the support of the symmetrical triangle from the first contact point with the resistance in order to obtain a bullish target price.

Some statistics about the symmetrical triangle top are:

– In 63% of cases, there is an upward exit.
– In 89% of cases, the bearish movement will continue after the breakout.
– In 81% of cases, the target price will be reached in case of a bullish breakout.
– In 60% of cases, a pullback occurs.
– In 70% of cases, bullish breakouts will occur when the price is moving into the highest third of its annual range.
– In 16% of cases, there will be false breakouts.

The exit normally happens towards 80% of the distance of the pattern.

Sharping and strong breakouts will give a better performance.

A performance is better when the triangle is formed at the beginning of a trend.

Try to avoid taking a position if the breakout occurs before 3/4s of the pattern.

Pullbacks can be harmful for the performance of the pattern.

A symmetrical triangle bottom is a bearish continuation pattern. This pattern forms two trend lines that are symmetrical to the horizontal and convergent. The initial one is a bearish slant that gives support and the other will be a bullish slant that will create a resistance. To prove a symmetrical triangle bottom there must have oscillation between the two lines. Each line has to touch at least twice for validation.

A symmetrical triangle “bottom” is necessary so the movement that preceded the formation of the triangle is being bearish.

A graphical representation of a symmetrical triangle bottom is below:

The price of this pattern will be determined by its height from the base of the triangle so that its carried over the break point. A similar technique is to draw a parallel line from the resistance of the symmetrical triangle to the first contact point with the support which will obtain a bearish target price.

Some statistics about the symmetrical triangle bottom are:

– In 57% of cases, there is an downward exit.
– In 91% of cases, the bullish movement will continue after the breakout.
– In 57% of cases, the target price will be reached in case of a bearish breakout.
– In 60% of cases, a pullback occurs.
– In 16% of cases, there will be false breakouts.

The exit normally occurs towards 80% of the distance of the pattern.

A sharping and strong breakout gives better performance.

The performance is greater when the triangle is formed at the beginning of a trend.

Be sure to avoid taking a position if the breakout occurs before 3/4s of  the pattern.

Pullbacks are harmful for the performance of the pattern.

The cup and Saucer has a continuous pattern. This pattern is formed by two rounded bottoms, the first is deeper and wider than the second. The height of the cup and the handle will be aligned along a straight horizontal resistance. This is the neckline of the pattern.

A few rules must be noted for the pattern to be valid.

The Cup and Saucer has to be preceded by a significant upward movement.  The lowest at the bottom of the cup has to be less than 50% of the upward movement preceding the pattern.  The lowest at the bottom of the handle must be less than 50% of the height of the cup.

The shape of the two bottoms of a rounding bottom reflect the gradual breathlessness of sellers. Buyers take advantage once the neckline breaks (psychological threshold), the purchasing power will become very strong.

The target pattern is calculated by plotting the height of the cup at the break point. But it is more advisable to defer only half the height of the cup according to the studies of T. Bulkowki.

Here is a graphic representation of a cup with handle:

The rounding top pattern is a reverse U-shape, also called a “reverse saucer. ” The top is rounded with a flat top. But as you’ll see in many cases there are several bullish peaks and they will not put in question the validity of the pattern.

The neckline of the pattern is constructed by the lowest point before the formation of the reverse U. A rounding top can be a bullish continuation pattern but also a downward continuation pattern.

A graphical representation of a rounding top is indicated below:

The U-shaped bottom is a rounding bottom, also called a “saucer. ” The dip is rounded with a flat bottom. But we’ll see in many cases there are several bearish peaks, but they do not question the validity of that pattern.

The neckline of the pattern is assembled by the highest point before the formation of the U.

Here is a graphical illustration of a rounding bottom:

There is no theoretical target price. Some authors will measure the depth of the U and then report it on the neckline like a double bottom. It is not a good suggestion to apply this method, actually the target is then reached in only 36% of the cases. The theoretical objective that is suggested, is to measure the depth of the U then divide by 2, to postpone this height on the neckline.

The rounding bottom reversal pattern has been lengthily considered. Consider the work that T. Bulkowski demonstrates that in a lot of cases the rounding bottom is a continuation pattern. When the neckline is broken, the results are quite good.

Here are some statistics about the rounding bottom:

– In 62% of cases, there will be a bullish reversal.
– In 86% of cases, the exit is upward.
– In 57% of cases, the target advised for this pattern will be reached .
– In 40% of cases, a pullback will occur on the neckline.
– In 95% of cases, there is a pursuit of the bullish movement after the breakout of the neckline.

The price will often make a break when the price gets back on the neckline.

The more the dip becomes flat, the more the movement at the breakout of the neckline will be strong.

If there is a pullback on the neckline after the breakout, the upward movement will be then less powerful.

If a significant upward spike occurs after the formation of the bottom, it is possible to draw a downward line to connect the high point prior to the formation of the rounding bottom and the highest of the bullish peak.

The descending flag shows as a continuation pattern. The flag is built by two straight downward parallel lines which is shaped like a rectangle. It is oriented in the direction of that trend which it consolidates. Contrary to a bearish channel, this pattern is quite short term and shows the fact that buyers will need a break.

The creation of an descending flag will occur in an upward trend. Often, this break will occur halfway through the movement.

The object calculation will be compared to the previous trend. A calculation of the height of the overall upward trend before the formation of the descending flag and then extends the low on the last lowest point of the pattern.

A graphical representation of a descending flag follows:

Look at some statistics about the descending flag:

– In 87% of cases, there is an upward exit.
– In 90% of cases, the descending flag shows a continuation pattern.
– In 62% of cases, the target of the pattern will be reached .
– 76% of cases, the descending flag occurs when the price is at the highest third of its annual range.
– In 10% of cases, a pullback occurs on the support.

The more the previous movement precedes the formation of the descending flag it is powerful, the more the bullish breakout will be strong.

The performance of a descending flag is not as important when it is oriented in the direction of the trend.

A descending flag with narrowed lines is performs more than a flag with outspread lines.

A descending flag is more powerful if there is no false breakout.

A bullish channel is called a continuation trend pattern. The bullish channel is assembled by two parallel lines that frame the upward price trend. A line is validated when there has been at least two points of contact with the price. The more contact points it has, the stronger the trend line is and the more their breakout will give a strong sell signal.

The bullish channel is one of the most used chart patterns. You can find it on every time frame. There is no theoretical target in this pattern. The movement can continue as far as the lower band is supported.

Here is a graphical representation of a bullish channel:

It is not recommended to take a short position at the contact with the upper band. Actually the trend may continue along the upper band. Besides, the movement towards the lower band are correction movements into an upward trend and are therefore less powerful.

Try to avoid false breakouts by drawing your trend lines based on high and low points of candlesticks and not their body.

The breakout often occurs at the 4th point of contact.

The more the lower band acts as support, the more the breakout will be violent.

The triple top is a bearish pattern with an MN shape. Three bottoms will come in succession, reflecting an important resistance. This marks a reversal will.

Below the triple top shows the area of resistance that will lead to a correction of the price three times. The neckline pattern will be formed by the lowest of these two bearish peaks. An initial correction will then occur and, then the price will go back on resistance. The magnitude of these three tops are normally the identical (as in the case below), but it may happen that the first top may be lower than the next two tops. This composition strengthens the validity of the pattern since it reflects a breathlessness of buyers.  If the second top is higher than the two others, it could be a head and shoulders pattern.

Another correction will take place, theoretically on the same level as the first correction. Provided that the neckline is broken at this point, then it can be a double top. In many instances we know afterward what type of pattern we will face. A return on the resistance must be done. If the third top were higher than the first two, then that would reinforce the chances of reversals (breathlessness of buyers). The third correction that will lead to the breakout of the neckline and will validate the bearish reversal.

Once this neckline is broken, it could happen that the price will take resistance on it (that line becomes a resistance, called a pullback), then the price will take up its bearish movement. A target price will be determined by the gap between the resistance and the neckline.

Another example of a triple top with a breathlessness of buyers (top are less and less high) is provided.

Following are are several statistics about the triple top:

– In 85% of cases, there is a downward exit.
– In 50% of cases, the target of the pattern is reached once the neckline is broken.
– In 84% of cases, a pullback will occur.
– In 85% of cases, there is a pursuit of the movement once the neckline is broken.

In case of pullback, the downward movement may not be as important once the target of the pattern is reached.

If the resistance is overly tested prior to a correction (flat top), then the decrease following the breaking of the neckline will be more important.

The more the three tops are close, the more of the percentage of success of the pattern is high.

The more the movements between the neckline and resistance are straight, the more the pattern is efficient.

The more the bullish movement proceeds the formation of the triple top is big, the more the downward movement at the breakout of the neckline will be strong.

The pattern is more efficient if the third top is not as high as the other two.

Reverse head and shoulders is a trend reversal pattern. It will mark a desire to make a bullish reversal. The theory is the same as a triple bottom other than the second bottom will be lower than the others, which are technically at the same height. The reverse head and shoulders pattern will be formed by three bottoms that will succeed.

The first and third bottoms are around the same height. It’s said that they formed the shoulders. The second top is lower than the other thus representing the lowest point. This is the head. There are few rules for many investors say that the height of the head should be 1.5 or 2 times lower than the shoulders. Investors also agreed that spacing between each bottom has to be the same. This is a major point to identifying patterns.

The highest attained between the shoulders and the head shape the neckline (in red below) that acts as a resistance. The neckline can be ascending (38% of cases), descending (40% of cases) or horizontal (22% of cases). This is the breakout of the resistance that validates the reversal patterns. The target price is equal in distance between the neckline and the bottom of the head that we symmetrically carry over to the neckline. This pattern is well known to investors and that is what makes it successful.

The reverse head and shoulders pattern offers a good performance on a bearish trend.

Some statistics about the reverse head and shoulders follows:

– In 98% of cases, there is an upward exit.
– In 97% of cases, there is a pursuit of the bearish movement at the breakout of the neckline.
– In 74% of cases, the target of the pattern is reached once the neckline is broken.
– In 52% of cases, a pullback occurs on the neckline.

The trend before the formation of the reverse head and shoulders is long, then the upward movement at the breakout of the neckline shall be strong.

The movement prior to the formation of the reverse head and shoulders is brutal, the upward movement at the breakout of the neckline will be very important.

Patterns with an descending neckline will give a better performance.

If the left shoulder is over the right shoulder, the pattern gives better performance.

Pullbacks on the neckline may be harmful to the performance of the pattern.

The double top is a bearish pattern shaped like an M. Two tops must succeed, imaging an important resistance. This marks a reversal. The pattern may also be in WV shape. We can consider a triple top as well.

The initial correction will decide how the neckline is evidenced by the lowest between the two tops. Consequently, the price will return to the resistance. The degree of the two or three tops will normally be the same (as our example below shows), however it may happen that the first top will be higher than the first one. This configuration will reinforce the validity of the figure since it will reflect a breathlessness of the buying movement. A third rebound could happen, but in all cases, it is the breaking of the neckline that should validate the bearish reversal.

Once the neckline is broken, it could happen that the price will get back to it (this line becomes the resistance), then will decrease again. The potential of this decrease is determined by the difference among the beginning resistance and of the neckline.

Following are several statistics about the double top:

– In 75% of cases, there will be a bearish reversal.
– In 71% of cases, the target of the pattern is reached once the neckline is broken.
– In 61% of cases, a pullback will occur.
– In 83% of cases, there is a pursuit of that movement once the neckline is broken.

In case of pullback, the upward movement will be less important once the target of the pattern is reached.

When more the two bottoms are closed, the more the percentage of success of the pattern is important.

The more the bullish movement that precedes the formation of the double top is important, the more the downward movement at the breakout of the neckline will be powerful.

A reversal pattern is called a diamond bottoms. This pattern is formulated by two juxtaposed symmetrical triangles. It is shaped like a diamond.

Diamond bottoms must be preceded by a downward trend. This pattern targets the shortness of sellers and consequently investor’s indecisiveness. Similarly, this pattern shows a growing volatility which is gradually reduced towards the end of the diamond.

Oscillations are increasing amplitude and then decreasing thus suggesting a trend reversal. Actually sellers gradually abdicate.

The target of the pattern is figured by plotting the maximum height of the diamond at the exit point. The upward movement is normally faster as the downward trend that precedes it.

Statistics about the diamond bottoms are as follows:

– In 82% of cases, there is an upward exit.
– In 60% of cases, the target of the pattern is reached.
– In 43% of cases, a pull back occurs.

There are three times more diamonds tops than diamonds bottoms.

It occasionally is possible to see an inverted head and shoulders within the diamond bottoms.

This pattern is difficult to see. At the beginning of the diamond formation, the pattern appears like a widening of a symmetrical triangle. But, the symmetrical triangle is a continuation pattern and the diamond is a reversal pattern.

A falling wedge is a bullish reversal pattern made by two converging downward slants. To prove a falling wedge, there has to be oscillation between the two lines. Each of the lines must be touched at least twice for validation.

The pattern labels the shortness of sellers. A characteristic is by a progressive reduction of the amplitude of the waves. The highest will reach during the first correction on the support of the wedge and will form the resistance. Another wave of decrease will then happen, but with lower amplitude, thus displaying the weakness of sellers. A second wave is formulated thereafter but prices will decrease lower and lower at the contact with the resistance. Volumes will then be at their lowest and eventually decrease as the waves. The movement will have almost no selling power which displays the willingness of a bullish reversal.

The target price is presented by the highest point that results in the formation of the wedge.

Check out some statistics about the falling wedge:

– In 92% of cases, there will be a downward exit.
– In 63% of cases, the target of the pattern will be reached once the resistance is broken.
– In 47% of cases, a pullback will occur on the resistance.
– In 27% of cases, false breakout occurs.

The spacing between each contact point on lines is necessary, it is important otherwise it could be a pennant.

More of the trend lines are sloped, the more the upward movement will be violent.

The downward retracement is normally two times faster than the formation of the wedge.

Pullbacks are detrimental to the performance of the pattern.

The breakpoint is normally located around 65% of the length of the falling wedge.

Falling wedges which are bigger give better performance than narrow wedges.

A bearish reversal pattern formed by two assembled upward slants is called a rising wedge. To validate rising wedge there must be oscillation between the two lines. These lines must be touched at least twice for validation.

The pattern indicates the shortness of buyers. This one is identified by a continuous reduction of the amplitude of the waves. The lowest will be reached during the first correction on the resistance of the wedge and will form the support. The second wave of increase will then occur, however with lower amplitude, which may appear the weakness of buyers. Another wave will be formed thereafter but prices will increase less and less at the contact with the support. Volumes will then be at their lowest and constantly decrease as the waves. This movement then has almost no buying power which will indicate the willingness of a bearish reversal.

The target price is given by the lowest point that resulted in the formation of the wedge.

Take a look at some statistics about the rising wedge:

– In 82% of cases, there will be a downward exit.
– In 55% of cases, the rising wedge shows a reversal pattern
– In 63% of cases, the goal of the pattern is reached once the support is broken
– In 53% of cases, a pullback arises on the resistance
– In 27% of cases, false breakouts occur

Note the spacing between each contact point the lines must be important otherwise it could be a pennant.

The more that the trend lines are sloped, the more the downward movement will be violent.

False bearish breakouts provide an indication on the side of the exit because in only 3% of cases, when a bearish breakout occurs, the price will go out of the wedge by the top. The risk of running a false bearish break out is quite low.

An upward retracement is normally two times faster than the formation of the wedge.

Pullbacks will be harmful to the performance of the pattern.

A break point is normally located around 60% of the length of the rising wedge.

Rising Wedges that are large will give better performance than narrow wedges.

Stock charts print different topping formations. Some are classics, like the Descending Triangle, which can be understood and traded with little effort. However the emotional crowd additionally generates many undependable patterns while greed slowly evolves into mindless fear. Complex Rising Wedges will challenge a technician’s best effort at prediction while the unusual Diamond pattern burns trading capital swinging randomly back and forth.

Skilled traders refrain from these fruitless positions and will only look for profits where the odds strongly favor their play. First they’ll locate a common feature discovered in most topping reversals. Price draws at least one lower high within the broad congestion prior to violating a major uptrend. This common double top mechanism will become the focus for their trade entry. From this precise signpost it will follow the price to a natural breaking point and enter when violated.

Remember the Adam & Eve Bottom discussed earlier. This unique formation consists of a spiking first bottom, followed by a rounded second one. Flip the pattern around and you will see a highly predictive structure for trading these topping reversals.

This easy Adam & Eve Top gives traders frequent high profit short sales opportunities. Take note of this classic pattern in Quantum’s chart. The price never drew a third high prior to entering a significant bear market.

Successful Adam & Eve short sales may be entered on the first violation of the reaction low, regardless of an underlying trend. Use tight stops to prevent “turtle reversals.” They happen when sharp shorts covering rallies unexpectedly erupt right after the gunning of stops below a violation point.

Every uptrend produces positive sentiment that has to overcome the topping structure. Adam & Eve tops represents an efficient bar structure to succeed in this task. The violent reversal of Adam first awakens fear. Then the slow dome of Eve devours the remaining bull impulse while dissipating volatility needed to resume a rally. As the dome finishes, price moves swiftly to lower levels without substantial resistance.

Observant technicians recognize the mechanics of Descending Triangles and Adam & Eve formations in a lot of complex reversals. The vast majority of tops contain some characteristics of these similar patterns. Crowd enthusiasm will be eliminated for a decline to proceed. Through the repetitive failure of price to achieve new highs, buying interest eventually recedes. Then the market can eventually drop from its own weight.

Double Top Breakdown

Quantum’s 1997 multi-year high breaks down in a dramatic Adam and Eve Top. Pay attention to both volume and volatility readings to decline gradually through the formation of the second rounded high. Often, this “Eve” consumes more price bars than the “Adam” that precedes it.

The formation, ascending broadening wedge is called this because of its similarity to a rising wedge formation and then has a broadening price pattern.

While symmetrical broadening formations have a price pattern that revolves about a horizontal price axis, the ascending broadening wedge differs from a rising wedge as the axis rises.

The upper trend line of an ascending broadening wedge goes upward at a higher rate than the lower one, thus creating an apparent broadening appearance. The ascending broadening wedge formations volume is likely to increase ever so slightly as the breakout advances.

The patterns are very trustworthy once a downside break happens, however they are less reliable prior to the break of the lower trend-line. Thomas Bulkowski’s Encyclopedia Of Chart Patterns notes the failure rate for this pattern formation is 24%, however only 6% where a downside break occurs, suggests that once the downside break happens there is a possibility that a price recovery and a continued decline should be expected.

Once the decline begins prices will most often decline to, or below, the start of the formation.

The two sloping trend lines are the most obvious thing you will notice; the upper one will have a slightly steeper slope than the lower one and the trend lines will then spread out over time while both slope upward. When prices break through the lower trend-line they will tend to drop quickly.

Price movement is contained and alternates between the two non-parallel trend-lines. This is indicated in the below chart.

On many occasions, these formations will appear towards the end of a rising price trend and signal a reversal. A partial rise does not predict a change in trend.

There are quite a number of characteristics that will be unique to ascending broadening wedge formations;

• The upwardly tilted megaphone shape.
• Both upper and lower trend-lines will slope higher.
• The upper trend-line will have a higher slope than the lower one, giving the appearance of a broadening formation.
• Each trend-line should have a minimum of three touches, or close to that.
• Volume normally rises as prices move up and declines as prices move down.
• Volume tends to rise over time in most cases.

If prices do break the lower trend line, the price action may be chaotic and occasionally runs straight through the lower trend-line without even pausing on the way through. The average decline of a confirmed pattern is about 20%

In the case of a partial rise going towards the end of the pattern, prices start moving upward, after having found support at the lower trend-line, then stop prior to touching the upper one. Prices will immediately return to the lower trend-line and normally head lower, breaking towards the downside.

In Thomas Bulkowski’s Encyclopedia Of Chart Patterns, only 6% of the formations breaking out downward will fail to continue moving down by more than 5%. This is an exceedingly low figure. Also there is a 76% chance that the formation will break out downward. It therefore pays to wait for a confirmed breakout.

The measure rule for this type of formation will differ from most other formations in that it will be based on the lowest daily low, not on the height of the formation. The low serves as the expected minimum price move.

Again this formation is a good account for downside breakouts. About 1 in 5 will see prices movement horizontally or even break out upward. Holding out for the downside break is the favorite  approach and considerably increases the possibility of a profitable trade.

When prices begin to decline below the lower trend-line, think about a short position and then be prepared to cover when prices approach the target or at the next closest level of price support.

Provided that you identify a partial rise, consider taking a short position since around 8 of 10 cases show a downside breakout following a partial rise, because you will have a ‘heads up’ profits should be larger. If this approach is taken, as the trade advances the lower trend-line, consider tightening your stop-loss in case price reverses, thereby protecting your position.

The right-angled and ascending broadening chart pattern is not one you might choose to trade. Other chart patterns perform much better. Downward breakouts have a big break even failure rate which may disqualify them from your trading tools. Upward breakouts have only a middling average rise, and that is if you trade them perfectly.

Would you trade a pattern with a likely profit potential of 10% or less? Perhaps a bearish chart pattern would appear, and the measure rule for that formation implied a downturn from 2700 to 2550, would you consider pursuing it further?

Some of these queries came up when the megaphone-like formation in the Dow Jones Transportation Average was noticed over the last two months. This compilation, with a flat, horizontal bottom and a progression of higher highs as well as a up-sloping trend line, is known as a right-angled broadening formation. Since the pattern is registering higher highs, it is referenced as an ascending broadening formation. However often “ascending” is a bit of a misnomer. Right-angled ascending broadening formations are bearish beasts.

Prior to taking a closer look at the pattern developing in the DJTA, more can be said about right-angled ascending broadening formations. Unlike other chart patterns, right-angled ascending broadening formations have an variable volume trend during the development of the formation, after all a volume surge on the breakout is common. While premature breakouts (upside or downside) tend to be isolated, pullbacks to the horizontal trend line are quite common. Also common are “partial rises” during which prices move toward the up-sloping trend line. These “partial rises” can be indications for a coming breakout, especially on the downside.

Fixed support at 2700 and higher highs in November and December establish this right-angled, ascending broadening formation. The declining relative strength also conveys a bearish retreat for the DJTA. Graphic provided by: MetaStock.

These characteristics are evident with the right-angled ascending broadening formation in the DJTA. The series of higher highs is present; the up-sloping trend line connects the highs of November with those of December. Also notice the steadfastness of the horizontal trend-line, which is hardly penetrated during the pattern’s development over the past two months. The “partial rise” phenomenon also seems to be effected, as the mid-December rally seems to have topped out at 2900.

Possibly one of the reasons why it is recommended that this formation is probably less beneficial has to do with waiting for the downside breakout. In the chart, a downside breakout would suggest a penetration of the horizontal line at 2700. The measure rule for right-angled, ascending broadening formations is sort of prudent, simply measure the distance from the highest high in the formation to the horizontal line at the bottom of the formation, then subtract that value from the horizontal line’s value. In this case, the formation’s high is at about 3000, while the horizontal line at 2700. This should give a formation size of 300 and cause a likely decline to as low as 2400.

The symmetrical broadening bottom is a bullish reversal pattern. The pattern is formed by two symmetrical horizontal lines that are divergent. So it is a inverted symmetrical triangle or an open triangle. The oscillations between the two bands of the triangle are therefore becoming more and more sizable. Each line must be touched at least twice for validation.

The symmetrical broadening bottomshows the growing nervousness of investors but also their indecisiveness. If the pattern is not identified quickly, the movement may seem totally random and thus trapping many investors.

The formation of this pattern should be preceded by an upward movement. This pattern is often due to cheap purchases that will form new highs. However, selling pressure remains strong and the indecisiveness is dominating.

The target price is given by plotting the height of the triangle at its start on the breakpoint. Another technique is to extend the maximum height of the triangle on the breakpoint.

Here is a graphical representation of a symmetrical broadening bottom:

The associated figure shows an example of a broadening bottom chart pattern on the daily scale. Price begins the broadening bottom at A and forms diverging peaks and valleys. At the end of the broadening bottom, C, a partial decline occurs which correctly predicts an upward breakout. This allowed astute traders early entry.

Notice that if you draw the top trendline to connect point B instead of C, the pattern would take on the appearance of a right-angled and descending broadening formation because the top trendline would be flat or nearly so. Also, price at E bounces to D and then makes a lower low at F. Point D looks like a partial rise which fails when the predicted breakout at F does not occur. This is one example of why trading broadening bottoms for profit is difficult, even if relying on a partial decline or partial rise.