Bullish

Market School: Chart Patterns – Symmetrical Triangle

Implication

A Symmetrical Continuation Triangle (Bullish) is considered a bullish signal, indicating that the current uptrend may continue.

Description

A Symmetrical Continuation Triangle (Bullish) shows two converging trendlines, the lower one is ascending, the upper one is descending. The formation occurs because prices are reaching both lower highs and higher lows. The pattern will display two highs touching the upper (descending) trendline and two lows touching the lower (ascending) trendline.

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Market School: Chart Patterns – Bottom Triangle

Implication

Bottom Triangles and Bottom Wedges are considered to be bullish signals that mark a possible reversal of the current downtrend.

Description

Bottom Triangles and Bottom Wedges make up a group of patterns which have the same general shape as Symmetrical Triangles, Wedges, Ascending Triangles and Descending Triangles. The difference is that these particular formations are reversal and not continuation patterns. These patterns have two converging trendlines. The pattern will display two highs touching the upper trendline and two lows touching the lower trendline. Contrary to Triangle formations, Wedges are characterized by their boundary trendlines both moving in the same direction.

This pattern is confirmed when the price breaks upward out of the Bottom Triangle or Bottom Wedge formation to close above the upper trendline.

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Market School: Chart Patterns – Bullish Head and Shoulders

Chart Patterns is a new series of Market School posts that we will be releasing in the coming weeks.

Implication

A Head and Shoulders Bottom is considered a bullish signal. It indicates a possible reversal of the current downtrend into a new uptrend.

Description

The Head and Shoulders bottom is a popular pattern with investors. This pattern marks a reversal of a downward trend in a financial instrument’s price.

Volume is absolutely crucial to a Head and Shoulders Bottom. An investor will be looking for increasing volumes at the point of breakout. This increased volume definitively marks the end of the pattern and the reversal of a downward trend in the price of a stock.

A perfect example of the Head and Shoulders Bottom has three sharp low points created by three successive reactions in the price of the financial instrument. It is essential that this pattern form following a major downtrend in the financial instrument’s price.

The first point – the left shoulder – occurs as the price of the financial instrument in a falling market hits a new low and then rises in a minor recovery. The second point – the head happens when prices fall from the high of the left shoulder to an even lower level and then rise again. The third point – the right shoulder – occurs when prices fall again but don’t hit the low of the head. Prices then rise again once they have hit the low of the right shoulder. The lows of the shoulders are definitely higher than that of the head and, in a classic formation, are often roughly equal to one another.

The neckline is a key element of this pattern. The neckline is formed by drawing a line connecting the two high price points of the formation. The first high point occurs at the end of the left shoulder and beginning of the downtrend to the head. The second marks the end of the head and the beginning of the downturn to the right shoulder. The neckline usually points down in a Head and Shoulders Bottom, but on rare occasions can slope up.

The pattern is complete when the resistance marked by the neckline is “broken”. This occurs when the price of the stock, rising from the low point of the right shoulder moves up through the neckline. Many technical analysts only consider the neckline “broken” if the stock closes above the neckline.

The volume sequence should progress beginning with relatively heavy volume as prices descend to form the low point of the left shoulder. Once again, volume spikes as the stock hits a new low to form the point of the head. It is possible that volume at the head may be slightly lower than at the left shoulder. When the right shoulder is forming, however, volume should be markedly lighter as the price of the stock once again moves lower.

It is most important to watch volume at the point where the neckline is broken. For a true reversal, experts agree that heavy volume is essential.

Variations of the Head and Shoulders Bottom

There are a few notable variations for this pattern.

Multiple Head and Shoulders Patterns

Many valid Head and Shoulders patterns are not as well defined as the classical head with a shoulder on either side. It is not uncommon to see more than two shoulders and more than one head. A common version of a multiple Head and Shoulders pattern includes two left shoulders of more or less equal size, one head, and then two right shoulders that mimic the size and shape of the left shoulders.

Flat Shoulders

The classic Head and Shoulders pattern is made up of three sharply pointed components – the head and two shoulders. This is not always the case. Sometimes, the shoulders can lack sharp low points and instead be quite rounded. This does not affect the validity of the pattern.

Important Characteristics

Following are important characteristics for this pattern.

Symmetry

In a classic Head and Shoulders Bottom, the left and right shoulders hit their relative low points at approximately the same price and level. In addition, the shoulders are usually about the same distance from the head. Experts like to see symmetry but variations are not lethal to the validity of the pattern.

Volume

It is critical to watch the volume sequence as this pattern develops. Volume will usually be highest on the left shoulder and lowest on the right. Investors, looking to ensure that volume increases in the direction of the trend, should ensure that a “burst” in volume occurs at the time the neckline is broken.

Duration of Pattern

It is not unusual for a Head and Shoulders bottom to take several months to develop. Volume activity in stocks is characteristically less after a period of declining prices than after a bull market. Because of this lower volume, bottoms take longer to form and tend to be smaller than tops

Need for a Downtrend

This is a reversal pattern which marks the transition from a downtrend to an uptrend.

Slope of the Neckline

In a well-formed pattern, the slope will not be too steep, but don’t automatically discount a formation with a steep neckline. Some experts believe an upward sloping neckline is more bullish than a downward sloping one. Others say slope has little to do with the stock’s degree of bullishness.

Trading Considerations

Duration of the Pattern

Consider the duration of the pattern and its relationship to your trading time horizons. The duration of the pattern is considered to be an indicator of the duration of the influence of this pattern. The longer the pattern the longer it will take for the price to reach the Target Price. The shorter the pattern the sooner the price move. If you are considering a short-term trading opportunity, look for a pattern with a short duration. If you are considering a longer-term trading opportunity, look for a pattern with a longer duration. The duration of the pattern is sometimes called the “width” or “length” of the pattern.

Target Price

The target price provides an important indication about the potential price move that this pattern indicates. Consider whether the target price for this pattern is sufficient to provide adequate returns after your costs (such as commissions) have been taken into account. A good rule of thumb is that the target price must indicate a potential return of greater than 5% before a pattern should be considered useful. However you must consider the current price and the volume of shares you intend to trade. Also, check that the target price has not already been achieved.

Inbound Trend

The inbound trend is an important characteristic of the pattern. A shallow inbound trend may indicate a period of consolidation before the price move indicated by the pattern begins. Look for an inbound trend that is longer than the duration of the pattern. A good rule of thumb is that the inbound trend should be at least two times the duration of the pattern.

Criteria that Support

Support and Resistance

Look for a region of support or resistance around the target price. A region of price consolidation or a strong Support and Resistance Line at or around the target price is a strong indicator that the price will move to that point.

Location of Moving Average

The Head and Shoulders Bottom should be below the Moving Average. Compare the location of the pattern to a Moving Average of appropriate length. For short duration patterns use a 50 day Moving Average, for longer patterns use a 200 day Moving Average.

Moving Average Trend

The Moving Average should change direction within the duration of the pattern and should head in the direction indicated by the pattern. For short duration patterns use a 50 day Moving Average, for longer patterns use a 200 day Moving Average.

Volume

Volume will usually be highest on the left shoulder and lowest on the right.

A strong volume spike on the day of the pattern confirmation is a strong indicator in support of the potential for this pattern. The volume spike should be significantly above the average of the volume for the duration of the pattern.

Other Patterns

Other reversal patterns (such as Bullish and Bearish Engulfing Lines and Islands) that occur at the peaks and valleys indicate strong resistance at those points. The presence of these patterns inside a Head and Shoulders is a strong indication in support of this pattern.

Criteria that Refute

No Volume Spike on Confirmation

The lack of a volume spike on the day of the pattern confirmation is an indication that this pattern may not be reliable. In addition, if the volume has remained constant, or was increasing, over the duration of the pattern, then this pattern should be considered less reliable.

Location of Moving Average

If the Head and Shoulders Bottom is above the Moving Average then this pattern should be considered less reliable. Compare the location of the pattern to a Moving Average of appropriate length. For short duration patterns use a 50 day Moving Average, for longer patterns use a 200 day Moving Average.

Moving Average Trend

Look at the direction of the Moving Average Trend. For short duration patterns use a 50 day Moving Average, for longer patterns use a 200 day Moving Average. A Moving Average that is trending in the opposite direction to that indicated by the pattern is an indication that this pattern is less reliable.

Short Inbound Trend

An inbound trend that is significantly shorter than the pattern duration is an indication that this pattern should be considered less reliable.

Market School: Japanese Candlesticks – Bullish Rising Three Methods

Rising Three Method IconThe Rising Three Method is a bullish continuation pattern (The opposite of the bullish Rising Three Methods pattern is the bearish Falling Three Methods). The first day’s green candlestick is followed by a group of small candlesticks, which hold within the long green candlesticks range. The small candlesticks can be any color but red is most common. The final day is a strong green candlestick with a close above the first day’s close. The formation represents a rest before resuming the bullish trend, which is similar to Flag or Pennant formations.

Intensifying factors:
- The ideal number of small candlesticks is three.
- If on the final day there is heavy volume.

[Real-Time Stock Chart via Daily Stocks for iPad]
Rising Three Method

The Bullish Rising Three Method pattern is included in our Daily Stocks iPad and Japanese Candlestick iPhone apps.

For a full list of Japanese Candlestick Patterns tracked by these apps visit our Japanese Candlesticks Page.

Market School: Japanese Candlesticks – Bullish Side by Side White Lines

Side by Side White Lines IconBullish Side by Side White Lines pattern is a bullish continuation pattern. The first candle is a green one, in fact, all three are green candles. The second candlestick opens with a gap over the first and the third one is similar size candlestick that opens near the second one.

Side by Side White Lines appears in a bullish market. The first candlestick confirms the continuation of the bull market. The second and third days are failed attempt to reverse the uptrend.

Intensifying factors:
-The similarity of the last two candlesticks is important.
-If on the third day there is heavy volume.

[Real-Time Stock Chart via Daily Stocks for iPad]
Side by Side White Lines

The Bullish Harami pattern is included in our Daily Stocks iPad and Japanese Candlestick iPhone apps.

For a full list of Japanese Candlestick Patterns tracked by these apps visit our Japanese Candlesticks Page.

 

Market School: Japanese Candlesticks – Bullish Harami Pattern

Bullish Harami IconThe Bullish Harami pattern (the reverse of the Engulfing Pattern) is a small green candlestick, which is contained with a prior relatively long red candlestick. The formation is comparable to Inside Day pattern (see NR4 ID). The pattern is more significant if the second candlestick is a Doji. Harami pattern without a Doji is usually not as much of a significant reversal signal as the Engulfing pattern.

The heavy selling is reflected by first day’s long red candlestick, and then it is followed by the small green candlestick which implies uncertainty. This could indicate a trend reversal since the bears’ power has diminished.

Intensifying factors:
- The smaller the second candlestick the stronger the reversal signal.

[Real-Time Stock Chart via Daily Stocks for iPad]
A Japanese Candlestick Bullish Harami Pattern in a real-time stock chart

The Bullish Harami pattern is included in our Daily Stocks iPad and Japanese Candlestick iPhone apps.

For a full list of Japanese Candlestick Patterns tracked by these apps visit our Japanese Candlesticks Page.

Market School: Japanese Candlesticks – Bullish Engulfing Pattern

Bullish Engulfing IconThe Bullish Engulfing Pattern is a reversal pattern characterized by a large green candlestick engulfing a red small candlestick, which appears after a downtrend.

The market has to be clearly in a downtrend. Day one continues the trend with a short red candlestick which suggests that the bears are still in command. The second day is a long green day that engulfs the body of the first day, closing well above the previous days open. This implies that the downtrend is losing momentum and the bulls are taking control.

Intensifying factors:
- The higher the relative signs of the bodies, the stronger the reversal signal.
- If the second day of the engulfing pattern engulfs more than one real body.
- If on the second day there is heavy volume.

[Real-Time Stock Chart via Daily Stocks for iPad]
Bullish Engulfing Pattern with intensifying factors shown in a real-time stock chart via Daily Stocks for the iPad

The Bullish Engulfing pattern is included in our Daily Stocks iPad and Japanese Candlestick iPhone apps.

For a full list of Japanese Candlestick Patterns tracked by these apps visit our Japanese Candlesticks Page.

Market School: Japanese Candlesticks – Bullish Three White Soldiers

Bullish Three White SoldiersThree White Soldiers is a group of three green candlesticks with consecutively higher closes (The opposite of the bullish Three White Soldiers pattern is the bearish Three Black Crows). If the pattern appears after low prices, then it is a sign of a strong reversal.

After the market has stayed at a low price for too long, we see a significant attempt upward shown by long green candlesticks. The rally continues in the next two days, which forces bears to cover their short positions. Each of the green candlesticks should close at, or near, its highs.

Be cautious, smaller body on the third day could be a signal of a weakening pattern.

Intensifying factors:
- If the opening price is above the middle of the previous day’s body.
- If the pattern appears at a low price area after a period of stable prices.

[Real-Time Stock Chart via Daily Stocks for iPad]
Three White Soldiers Bullish Japanese Candlestick Pattern shown in a real-time chart via the iPad app "Daily Stocks"

The bullish Three White Soldiers pattern is included in our Daily Stocks iPad and Japanese Candlestick iPhone apps.

For a full list of Japanese Candlestick Patterns tracked by these apps visit our Japanese Candlesticks Page.

Market School: Japanese Candlesticks – Bullish Morning Star

Morning Star bullish Japanese Candlestick Pattern iconThe bullish Morning Star is a three candlestick bottom reversal formation (The opposite of the bullish Morning Star pattern is the bearish Evening Star pattern). It is comprised of a long red body followed by a small body, gapping lower to form a star. The third day is a green body that closes well into the first day’s red body. The third candlestick signals that bulls have seized control.

The red candlestick suggests that the bears are in command. The small candlestick means sellers are losing the capacity to drive the stock lower. The third day’s long green candlestick proves that bulls have taken over.

Intensifying factors:
- A gap before and after the second day’s real body.
- If the third candlestick closes deeply into the first candlestick’s real body.

[Real-Time Stock Chart via Daily Stocks for iPad]
Morning Star showin in a real-time chart on an iPad app with intensifying factors

The bullish Morning Star pattern is included in our Daily Stocks iPad and Japanese Candlestick iPhone apps.

For a full list of Japanese Candlestick Patterns tracked by these apps visit our Japanese Candlesticks Page.

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