INTRODUCTION TO CHART PATTERNS – COMMON MARKET REVERSAL PATTERNS

These patterns tend to occur when a market it running out of steam in either an uptrend or downtrend. It is a change in market sentiment by traders and investors and they can lead to extreme moves in the market. Using volume indicators can be useful during signs of a reversal as you would expect volume to increase during a reversal pattern.

The diagrams below indicate what patterns you would expect to see that could be an indication that prices in the market are about to reverse in the opposite direction.

In both images above the market has been in a trend but prices break in the opposite direction as the trend gets narrower.

In the example above left the market has made a new high to the left, it retraces down to our support level, retests the high again in the right triangle only to fail to make new highs and we see a sharp move on the downside which also penetrates our support line from the previous lows. Double tops are quite common in charts because there is always a test on previous highs and lows, so volume confirmation is also a good indicator to confirm a reversal of a double top.

Above right is the opposite to a double top and as such it should be treated in the same way but with a reversal in the opposite direction.

The pattern below can indicate a bullish-to-bearish trend reversal. Head and shoulders patterns have a varying degree of success indicating that an upward trend is nearing its end. The danger of this pattern is that it could be forming a triangle, since a trend in motion is more likely to continue north!