Reversal Chart Patterns

What are Reversal Chart Patterns?

Reversal Chart Patterns are patterns which reverses the trend of a stock once the pattern is confirmed. While a continuation pattern suggests that a trend in place will continue in the same direction after a brief pause/correction, a failed continuation pattern may well turn into a reversal pattern. Like their name implies, reversal patterns suggest that one trend is ending and the market is ready to begin another trend in the opposite direction or, perhaps more likely, to move sideways for a while.

Implications of Reversal Chart Patterns

Reversal patterns often take a long time to form on the chart and represent major changes in trend. The larger the pattern, the greater the potential price movement. The height of the pattern measures volatility, while the width measures time required to complete the pattern. (Patterns at market tops are usually more volatile and shorter in time than bottoms.) Remember, a trend must exist for the pattern to be valid, and breaking a major trendline does not necessarily indicate a trend reversal (it might be the beginning of a sideways trend). Some of the more common reversal patterns include head-and-shoulders, double tops and double bottoms and saucers.

Types of reversal Chart Patterns

Reversal Chart Patterns includes - 

Double Tops - A previous high may act as a target for a new move to the upside or as a barrier that an uptrend may not be able to penetrate. If this resistance holds and prices turn back, the price reversal may form a double top and makes that price area a more formidable barrier to exceed in the future. 

Double Bottom - A mirror image of the double top is the double bottom: Prices drop to the vicinity of a previous low and bounce back up from this support zone. This reversal at a former low can make this level an even stronger area of support if it is tested several times. 

M Tops & W Bottom - A close cousin of the double top and double bottom are the M top and W bottom, so-called because of the letters formed when the thrust to a previous high or previous low does not reach the same level as the first high or low. The key that confirms a price reversal is a break above the interim high on the W bottom and a break below the interim low at the M top. The interim highs and lows can often be used to determine where to place entry or exit orders, depending on your market position going into the pattern.

Head & Shoulders Top -  Head and shoulders top is a reversal pattern found in the top of trend, and it detects trend reversals from uptrend to downtrend. It contains three peaks; left shoulder, head and right shoulder. Head is the highest peak among them. There is a neckline connecting the low points of left and right shoulder. Minimum possible price movement equals to the distance from head to neckline of the pattern. 

Head & Shoulder's Bottom - Inverse head and shoulders/head and shoulders bottom pattern is the exact opposite to the head and shoulders top pattern. This pattern consists of three low points; left shoulder, head and right shoulder. Head is the lowest point among these three low points. Minimum possible price movement equals to the distance between head and neckline.

Rising Wedge - 

• A rising wedge is a bearish pattern that signals that the security is likely to head in a downward direction. The trend lines of this pattern converge, with both trend lines slanted in an upward direction. Again, the price movement is bounded by the two converging trend lines. As the price moves towards the apex of the pattern, momentum is weakening. A move below the lower support would be viewed by traders as a reversal in the upward trend. 

• As the strength of the buyers weakens (exhibited by their inability to take the price higher), the sellers start to gain momentum. The pattern is complete, with the sellers taking control of the security, when the price falls below the supporting trendline. 

Falling Wedge - 

• The falling wedge is a generally bullish pattern signaling that one will likely see the price break upwards through the wedge and move into an uptrend. The trend lines of this pattern converge, with both being slanted in a downward direction as the price is trading in a downtrend. Another thing to look at in the falling wedge is that the upper (or resistance) trendline should have a sharper slope than the support level in the wedge construction. When the lower (or support) trendline is clearly flatter as the pattern forms, it signals that selling pressure is waning, as sellers have trouble pushing the price down further each time the security is under pressure.  

• The price movement in the wedge should at minimum test both the support trendline and the resistance trendline twice during the life of the wedge. The more times it tests each level, especially on the resistance end, the higher quality the wedge pattern is thought to be. 

• The buy signal is formed when the price breaks through the upper resistance line. This breakout move should be on heavier volume, but due to the longer-term nature of this pattern, it's important that the price has successive closes above the resistance line. 

Rounded Bottom -  A chart pattern used in technical analysis, which is identified by a series of price movements that, when graphed, form the shape of a "U". Rounding bottoms are found at the end of extended downward trends and signify a reversal in long-term price movements. This pattern's time frame can vary from several weeks to several months and is deemed by many traders as a rare occurrence. 

Diamond - A reversal pattern that is relatively rare – or perhaps envisioning it is just more uncommon – is the diamond pattern, formed by a series of prices that rally into a high, drop sharply, then rally again but fall off quickly to leave a more or less isolated pattern at a market extreme. The breakout can produce a sharp turn in prices such as the gap lower move on the chart beside. 

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