Bearish Chart Patterns

The pattern shown in Figure 4.13 forms after a long upward move in

trend slows down. As momentum stalls, buying and selling create a

consolidation pattern. This pattern will occur after an explosive

opening. Remember Figure 4.11, the open trend run? Many times,

the open trend run will become a consolidation exhaustion failure.

The double top formation is usually a high-probability, profitability

chart pattern. (See Figure 4.14.) There are several factors

that lead to trading the double top with a high-probability outcome.

One of the most important is to concentrate on the word top. For a

double top to become a bearish pattern, you must have a long, protracted

run-up until you encounter resistance. Momentum stops and

price begins the first downward move, identified by letter A in Figure

4.14. Price then moves to the neckline, identified by the dotted line

at letter B, and rebounds back to retest resistance at A. Upward

momentum fails, and once again price begins to fall to the neckline.

Letter C shows price breaking below the neckline and moving lower.

Once price moves below the neckline, you short the stock, placing a

protective stop exit at letter D. The key to identifying a double top is

focus on the word top. The pattern will fail if it does not have the necessary

long, protracted run-up to make it a top formation.

One of the most important patterns to learn to identify is parabolic

run. A parabolic run is an angle that violates the normal angle

of ascent. Usually, the angle is greater than 45 degrees. In Figure

4.15, the angle is identified by the dotted line. The arrow points to

the reversal day when the last buyer came to buy at the high. From

that point on, the trend was down in a sequence of lower highs and

lower lows. Long parabolic moves downward are characterized by

a long run-up in price at or near a top. Parabolic runs are important

to identify because you typically do not want to buy stock right

after a parabolic run occurs. Parabolic runs have two rules that you

should always keep in mind:

1. When a parabolic run takes place, expect a retracement.

This retracement can be 30 to 50 percent of the previous

move, or the 17-period exponential moving average on a

five-minute bar chart.

2. Once a parabolic move has taken place and a reversal day

is in place, look for a consolidation to occur.

Parabolic runs and the rules that accompany them are true in

daily and intraday bar chart analyses.

In many cases, chart pattern rules that hold true in the analysis

of daily bar charts are inaccurate when it comes to intraday

charts. An excellent example of this is an ascending triangle formation.

In daily analysis, this chart pattern is very bullish and a very

highly profitable pattern to trade. This is not the case with an intraday

ascending triangle. Let's look at the example of an intraday

Letter A shows the range in a five-minute chart becoming

smaller toward the apex of the ascending triangle. When you see

this beginning to occur, the probability of a price breakout above

the dotted resistance line is minimal. This pattern in a five-minute

chart is bearish, not bullish—the opposite of what it would be in a

daily chart. As always, you wait for confirmation of the price break.

If the base at the far left of the chart pattern is wide, as it is in Figure

4.16, it is far more likely that the resistance line will hold, turning

back any bullish breakout. If the base is narrow and price rises in a

more even and normal fashion toward the apex of the triangle, it is

likely to break out in a bullish trend above the resistance line. It is

important to understand that an ascending triangle pattern is the

opposite of the classic bullish pattern.

After a gap, the pattern forms a descending pennant with lower

highs and lower lows, as shown in Figure 4.17. When price breaks

down, it should travel lower by the distance measured from the

widest part of the pennant to point A. Point B illustrates the downside

projection. Pennants come in all sizes. The line drawing to the right in small formation. Pennants as a rule are not high-probability chart patterns.

This particular chart pattern is one of the few that work out

more than 50 percent of the time. Learning to identify intrachart patterns

is critical to your success. Most new traders do not understand

that bearish patterns can be far more profitable than bullish patterns.

Let us now learn about intraday by shorting.

The pattern shown in Figure 4.13 forms after a long upward move in

trend slows down. As momentum stalls, buying and selling create a

consolidation pattern. This pattern will occur after an explosive

opening. Remember Figure 4.11, the open trend run? Many times,

the open trend run will become a consolidation exhaustion failure.

The double top formation is usually a high-probability, profitability

chart pattern. (See Figure 4.14.) There are several factors

that lead to trading the double top with a high-probability outcome.

One of the most important is to concentrate on the word top. For a

double top to become a bearish pattern, you must have a long, protracted

run-up until you encounter resistance. Momentum stops and

price begins the first downward move, identified by letter A in Figure

4.14. Price then moves to the neckline, identified by the dotted line

at letter B, and rebounds back to retest resistance at A. Upward

momentum fails, and once again price begins to fall to the neckline.

Letter C shows price breaking below the neckline and moving lower.

Once price moves below the neckline, you short the stock, placing a

protective stop exit at letter D. The key to identifying a double top is

focus on the word top. The pattern will fail if it does not have the necessary

long, protracted run-up to make it a top formation.

One of the most important patterns to learn to identify is parabolic

run. A parabolic run is an angle that violates the normal angle

of ascent. Usually, the angle is greater than 45 degrees. In Figure

4.15, the angle is identified by the dotted line. The arrow points to

the reversal day when the last buyer came to buy at the high. From

that point on, the trend was down in a sequence of lower highs and

lower lows. Long parabolic moves downward are characterized by

a long run-up in price at or near a top. Parabolic runs are important

to identify because you typically do not want to buy stock right

after a parabolic run occurs. Parabolic runs have two rules that you

should always keep in mind:

1. When a parabolic run takes place, expect a retracement.

This retracement can be 30 to 50 percent of the previous

move, or the 17-period exponential moving average on a

five-minute bar chart.

2. Once a parabolic move has taken place and a reversal day

is in place, look for a consolidation to occur.

Parabolic runs and the rules that accompany them are true in

daily and intraday bar chart analyses.

In many cases, chart pattern rules that hold true in the analysis

of daily bar charts are inaccurate when it comes to intraday

charts. An excellent example of this is an ascending triangle formation.

In daily analysis, this chart pattern is very bullish and a very

highly profitable pattern to trade. This is not the case with an intraday

ascending triangle. Let's look at the example of an intraday

Letter A shows the range in a five-minute chart becoming

smaller toward the apex of the ascending triangle. When you see

this beginning to occur, the probability of a price breakout above

the dotted resistance line is minimal. This pattern in a five-minute

chart is bearish, not bullish—the opposite of what it would be in a

daily chart. As always, you wait for confirmation of the price break.

If the base at the far left of the chart pattern is wide, as it is in Figure

4.16, it is far more likely that the resistance line will hold, turning

back any bullish breakout. If the base is narrow and price rises in a

more even and normal fashion toward the apex of the triangle, it is

likely to break out in a bullish trend above the resistance line. It is

important to understand that an ascending triangle pattern is the

opposite of the classic bullish pattern.

After a gap, the pattern forms a descending pennant with lower

highs and lower lows, as shown in Figure 4.17. When price breaks

down, it should travel lower by the distance measured from the

widest part of the pennant to point A. Point B illustrates the downside

projection. Pennants come in all sizes. The line drawing to the right in small formation. Pennants as a rule are not high-probability chart patterns.

This particular chart pattern is one of the few that work out

more than 50 percent of the time. Learning to identify intrachart patterns

is critical to your success. Most new traders do not understand

that bearish patterns can be far more profitable than bullish patterns.

Let us now learn about intraday by shorting.