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Learning to recognize price chart patterns is an important part of trading. But it is also important to observe deviations from "standard" patterns and to know which are important. For example
- Lower tops and lower bottoms bounded by two parallel trendlines with the pattern slanting against the prevailing trend characterize bullish flag. However, this is not an essential requirement, as 25% of the observed patterns slope horizontally, or in the same direction as the prevailing trend.
- The volume trend is of critical importance in assessing the validity of the patterns, as 85% of the formations had declining volume over the development of the formation.
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 Recent Picks / Trading Ideas |
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Dillard's Inc - DDS - Descending trendline March 6
DDS: the recent rally became exhausted as it neared the resistance of the descending trendline
which is also an area that will continue to prevent agressive moves higher
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MetLife Inc - MET - Lower highs February 14
MET - trading near a significant level of resistance. The 50-day MA has prevented the stock from moving
higher in the past and there is no reason to expect this story to change now
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Autodesk Inc - ADSK November 29
ADSK: Fibonacci Fan indicator is suggesting that the stock is getting ready
to make a short-term move higher
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Price is Everything - Chart Patterns
Technical analysis is the study of historical price performance in an effort to predict future price performance (chart patterns). Price is the only accurate measure of investor sentiment -- it is the intersection of supply and demand. Investor sentiment is at least and possibly a more important determinant of price than fundamental factors like earnings, revenues and profit margins.
There are three important principles that govern all technical analysis. First, price is NOT random, second, price anticipates fundamental change and third, the relationship between price and time is linear. This is why stock price moves can be viewed as patterns on price chart.
Different strategies have varying degrees of success depending upon where the market is in a bigger time frame. Technical analysis of a strong uptrending market will show that basing patterns are frequently broken to the upside forming a "stair-step" chart patterns. This is a strong chart pattern in a strong market. However the same trader who continues to use this pattern without recognizing that the market has now lost momentum and is in a basing phase will not have the same success. Traders will find that breakouts do not carry as far and that many breakouts start to fail and become losses.
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