5 important Trend reversal pattern

Sunday, November 21, 2010

Head and Shoulders pattern is one of the most classic patterns in a technical analysis.


This three-peak formation is named for its resemblance to a head and two shoulders. The center peak (head) protrudes above the remaining two peaks (shoulders), which are set at or close to identical levels. The common line of support for all three peaks is known as the Neckline, which does not have to be a horizontal line. The final downward penetration of the neckline confirms the start of a new downward trend.
A real example which has formed on NIFTY daily chart is below

Inverse Head and Shoulder pattern follows the same model.

Double top is formed when the price of a pair in an uptrend rises and encounters resistance. Following this, price retreats to a support level which will become the neckline and subsequently returns to the resistance level. After failing to break the resistance level a second time the pair falls back down. At the neckline price breaks down into a new downward trend. 

The same but opposite scenario occurs in the case of a double bottom. A downtrend reverses after testing a certain support level twice. Failing to breakthrough, price reverses into a new uptrend

In the typical triple top formation each one of the heads is about the same size. A line of resistance can be drawn connecting the three tops. A neckline should be drawn connecting the support levels. After the third head, price falls below the neckline. The market may rebound for a short attempt at breaking back past the neckline only to be followed by the start of a new downward trend.


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