Technical Analysis
Popular Charting Patterns
Many believe that history
repeats itself. Successful and proven price patterns
from great stocks are widely used by technical analysts.
Let's take a look at a few examples:
- Cup and Handle - This is
a pattern on a bar chart that can be as short as 7
weeks and as long as 65 weeks. The cup is in the shape
of a U. The handle has a slight downward drift. The
right hand side of the pattern has low trading volume.
As the stock comes up to test the old highs, it
will incur selling pressure by the people who bought
at or near the old high. This selling pressure will
make the stock price trade sideways with a tendency
towards a downtrend for 4 days to 4 weeks, then it
takes off.
It looks like a pot with handle. Investors have made
a lot of money using this pattern, which is one of
the easier to detect.
- Head and Shoulders - A chart
formation that resembles an "M" in which a stock's
price:
- rises to a peak and then declines, then
- rises above the former peak and again declines,
and then
- rises again but not to the second peak and again
declines.
The first and third peaks are shoulders, and the second
peak forms the head. This pattern is considered a
very bearish indicator.
- Double Bottom - Occurs
when a stock price drops to a similar price level
twice within a few weeks or months, the double-bottom
pattern resembles a "W". A buy signal is triggered when
the price passes the highest point in the handle.
In a perfect double bottom, the second decline should
normally go slightly lower than the first decline
to create a shakeout of jittery investors. The middle
point of the "W" should not go into new
high ground. This is a very bullish indicator.
The belief is that after two drops in the stock price
the jittery investors are out and long-term investors
are still holding on.
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