Bull flags, also known as bullish pennants, are my favorite chart pattern and are considered a continuing trend pattern. They typically form as a stock consolidates after a sharp move higher. During the consolidation, the stock makes lower highs and higher lows bringing the price action to what is known as an inflection point. The result is price action that resembles a flag on a flagpole. When the trading range tightens, a stock breaking out of a bull flag will trade higher than the previous high building momentum as the uptrend continues. Traders will often use the highest low made right before the stock broke out as their stop loss, or price they will get out if the stock falls.
Double Bottoms are reversal patterns. These occur when a stock has been in a steep downtrend and finds support. After a stock has a minor bounce, the first low is in place. Then, once a stock dips down to test the first low or support level and does not go any lower, a double bottom is in place and the stock will usually bounce from that level establishing a new uptrend. Traders use the two lows or support as their exit point should the stock fall any lower.
Descending Wedge patterns are also trend reversals. These occur when a stock is in a downtrend and is making lower highs and lower lows.
When a stock breaks above the previous high to make a higher high and does not fall back to make a lower low, it is said to have broken out of a descending wedge and is typically followed by a new uptrend.
Head and Shoulders:
Head and shoulders patterns come in two different types, one bearish and one bullish (known as a reverse head and shoulders). But before I get into a reverse head and shoulders it is best I explain a normal head and shoulders pattern first.
A head and shoulders pattern is a trend reversal pattern. It occurs after a stock has had an uptrend. In this pattern, a stock clearly makes three tops with the second of the three being the highest. This high is known as the “head.” The other two lower highs are known as the “shoulders”. And the base of the trading range is known as the “neckline.” A break below the neckline is a bearish move and indicates a new downtrend is in place.
Reverse Head and Shoulders:
A reverse head and shoulders has the same concept as a regular head and shoulders pattern except the pattern is inverted or upside down. Instead of the stock making highs, it’s making lows with the lowest low being in the middle of the two shoulders. A break above the neckline in a reverse head and shoulders is a bullish indicator and typically results in a new uptrend.
Cup and Handle:
A cup and handle is a bullish chart pattern. The cup is in the shape of a “U” and the handle has a slight downward drift. The right-hand side of the pattern will typically have lower trading volume and last a relatively short period of time compared to the cup.
As the stock comes up to test the old highs, the stock incurs selling pressure from the people who bought at or near the old high. This selling pressure will make the stock price trade sideways with a tendency towards a downtrend for a short period of time before eventually breaking out to new highs
Inverted Cup and Handle:
An inverted cup and handle is a bearish pattern and just the opposite of a regular cup and handle. A stock will bounce off a low but fail to gain momentum creating price action taking the shape of an upside down “U”. Upon reaching the previous low, one final attempt to recover or bounce creates the handle before breaking down to new lows.