Basic Chart PatternsBasic Chart PatternsEveryone Should Everyone Should

KnowKnow

Michael Kahn, CMTMichael Kahn, CMTFebruary 2011February 2011

Who am I?Who am I?

Chartered Market Technician (CMT)Chartered Market Technician (CMT) trained and certified in market trained and certified in market

analysisanalysis

Columnist – Barron's OnlineColumnist – Barron's OnlineNewsletter Editor – Quick Takes ProNewsletter Editor – Quick Takes ProFund Co-Manager – (the silence of Fund Co-Manager – (the silence of

compliance)compliance)Former charting software designerFormer charting software designer

……and beaten up enough by the marketsand beaten up enough by the markets

What can I do for you?What can I do for you?

Help investors assess risk and Help investors assess risk and reward.reward.

no crystal ballno crystal ball

no tea leavesno tea leaves

no chicken entrailsno chicken entrails

No Guarantees!No Guarantees!

Owning a hammer does not make Owning a hammer does not make you a carpenter.you a carpenter.

Buying P90X does not make you a Buying P90X does not make you a swim suit model.swim suit model.

Using charts does not make you Using charts does not make you money.money.

……..but they all can – if you work at ..but they all can – if you work at them.them.

Types of PatternsTypes of Patterns

1.1. Market at Market at rest…………...continuationsrest…………...continuations

2.2. Market finished …………reversalsMarket finished …………reversals

3.3. Market uncommitted……Market uncommitted……directionlessdirectionless

Types of PatternsTypes of Patterns

Most patterns have simple names Most patterns have simple names based on what they look like.based on what they look like.

A A Double Reverse WhirligigDouble Reverse Whirligig, if it , if it existed, would be far too complex to existed, would be far too complex to be useful.be useful.

K.I.S.S!K.I.S.S!

Continuation PatternsContinuation Patterns

TrianglesTriangles Rectangles Rectangles (aka trading ranges)(aka trading ranges)

FlagsFlags GapsGaps

But look at the next slide….But look at the next slide….

Reversal PatternsReversal Patterns

TrianglesTriangles Rectangles Rectangles (aka trading ranges)(aka trading ranges)

Flags Flags (well, not so much(well, not so much)) GapsGaps

Huh?Huh?

Key PointsKey Points

The shape of a pattern yields clues to The shape of a pattern yields clues to what is going on in terms of market what is going on in terms of market psychology.psychology.

The position of the pattern in the The position of the pattern in the context of what came before it is also context of what came before it is also critical.critical.

Patterns lean one way or the other but Patterns lean one way or the other but the market decides which way it the market decides which way it breaks.breaks.

Directionless PatternsDirectionless Patterns

Volatile swingsVolatile swings Dead calmDead calm Real-looking patterns but with Real-looking patterns but with

fuzzy bordersfuzzy borders

If you cannot eyeball the pattern in If you cannot eyeball the pattern in half a second then there is no half a second then there is no pattern. Move on.pattern. Move on.

The Everything ChartThe Everything Chart

TrianglesTriangles

TrianglesTriangles

TrianglesTriangles

TrianglesTriangles

RectanglesRectangles

RectanglesRectangles

RectanglesRectangles

RectanglesRectangles

FlagsFlags

FlagsFlags

GapsGaps

Four Types

Breakaway

Measuring (continuation)

Exhaustion

Unclassified

GapsGaps

GapsGaps

GapsGaps

GapsGaps

DirectionlessDirectionless

Directionless - or is it?Directionless - or is it?

SummarySummary

Chart patterns exist when the trend is in transition.

Basically, the market is resting. Our job is to determine if it is resting in preparation for the next leg or in preparation to turn around.

The shape of the pause gives us clues but we must wait for the market to make the final decision by moving out decisively from the pattern.

SummarySummary

Other than gaps, most patterns are variations of the others.

Flags sag because during the decline the bears were more aggressive than they were in rectangles

In triangle, both bulls and bears become increasingly more uncertain.

The real reason we do The real reason we do this:this:

To make the buy, sell To make the buy, sell or hold decision.or hold decision.

Not to predict the futureNot to predict the future

Quick Takes ProQuick Takes Pro www.QuickTakesPro.comwww.QuickTakesPro.com

Getting TechnicalGetting Technical www.Barrons.comwww.Barrons.com

Month AheadMonth Ahead www.MarketWatch.comwww.MarketWatch.com

Books Books (www.QuickTakesPro.com(www.QuickTakesPro.com/education.html/education.html))Beginner’s Guide to Charting Financial MarketsBeginner’s Guide to Charting Financial Markets

Technical Analysis: Plain and Simple – 3Technical Analysis: Plain and Simple – 3ndnd edition edition

Real World Technical AnalysisReal World Technical Analysis

……plus my favorites from other authorsplus my favorites from other authors

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