Stock chart patterns are the visual cues that emerge from historical stock price data, providing traders insight into existing supply and demand for the stock. Studying the underlying patterns or shapes in a stock chart can aid in evaluating the momentum (uptrend/downtrend), support and resistance of the stock. The next few posts will look at the various chart patterns that can be identified. 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).
Chart patterns are classified into continuation and reversal patterns:
Cup and Handle Pattern
This type of pattern occurs during an upward swing of the stock. As the name indicates, the pattern refers to an area where the prices stagnate (the cup) followed by a small increase (to form the handle) before breaking out again to move significantly higher, most likely with increase in trade volume.
Flag patterns can be of the bull (occurring during continuing price increases) or bear (found during periods of declining prices) type.
Bull Flag Pattern
The bull flag pattern is seen during an uptrend where a big price increase is followed by a minor drop in price that resembles a slight downward tilt or the lines at least remain horizontal instead of continuing to rise. The pattern is similar to a flag hoisted on a pole. The volume of the stock will remain consistent during price increases but might shrink during the flagging period.
Bear Flag Pattern
The bear flag pattern can be seen during a downtrend. This continuation pattern occurs when a consistent downtrend is interrupted by a minor increase or stagnation. The bear flag is so named due to the similarity to an inverted flag on a pole. The price decline period will have solid volume, while the slight correction may show a decrease in volume.
Bull Pennant Pattern
The bull pennant pattern is seen during an upward movement of the stock and resembles a pennant on a pole. The bull pennant pattern is similar to the bull flag pattern but with converging trend lines in the resting phase instead of horizontal ones. The stock increases in price with solid volume, rests in the bull pennant pattern region with reduced volume before continuing its onward march.
Bear Pennant Pattern
The bear pennant pattern is found during the downswing of a stock and resembles an inverted pennant on a pole. It is a resting period during the decline similar to the bear flag pattern but with converging lines. The stock drops in price with solid volume, rests in the bear pennant pattern region with reduced volume before continuing its slide.
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.