The previous post had discussed about a few stock chart continuation patterns. This week we’ll look at another type of stock chart pattern – the reversal pattern. Please note that the screen shots may not perfectly reflect the definition of that pattern, which a trader performing technical analysis would look for and accept and only meant to provide some visual idea instead of mere text (click on images for enlarged views).
Reversal Type Patterns
As would be evident from the name, a trend needs to have been established prior to the emergence of a reversal pattern. A breakout from a trend line indicates the trend reversal with a larger pattern signaling a bigger move in price. There are several types involved and four of them are listed below.
Head and Shoulders Top
A head and shoulders top is a bearish reversal stock chart pattern. Following an uptrend, the price movement tends to form a pattern with three highs resembling a left shoulder, head, and right shoulder, and a neckline buttressing the lows. The volumes during the pattern are higher at the left shoulder than at the head indicating that the price is increasing without any major interest in the stock and suggesting that a reversal is on the cards. A breakout through the neckline (dips in price) with increasing volume confirms the reversal pattern.
Head and Shoulders Bottom
A head and shoulders bottom is a bullish reversal pattern. Following a downtrend, the price movement tends to form a pattern with the three lows resembling an inverted head and shoulders top pattern. The volumes during such a bottom pattern are higher at the left shoulder than at the head indicating that the price is falling without significant market participation. A breakout through the neckline (price peaks) confirms the reversal pattern.
A double top is a bearish reversal pattern. During an uptrend, the price chart shows a couple of peaks, which may or may not be at the same price, with a few lows between them. A double top pattern is confirmed when a reversal occurs with the prices unable to attain a new peak and fall below the lows (between the peaks), usually with increasing volume.
A double bottom is a bullish reversal pattern. During a downtrend, the price chart shows a couple of troughs, which may or may not be at the same price, with a few highs between them. A double bottom pattern is confirmed when a reversal occurs with the prices unable to pierce the existing trough line and increase above the highs (between the lows), usually with expanding volume.
About the Author: Clark works in Saskatchewan and has been working to build his (DIY) investment portfolio, structured for an early retirement. He loves reading (and using the lessons learned) about personal finance, technology and minimalism. You can read his other articles here.