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When analyzing charts, we look for patterns — i.e., objects or shapes that call to mind an
image of a similar event in the past. Because patterns repeat, we can use them to
determine the probability of a certain outcome. Technical analysis helps us distinguish
between what is real and what we think is real. As I always say, “The charts never lie.”
Technical analysis is full of patterns, most aptly named for the type of shape they make. I’m
going to describe a few of the more common bullish chart patterns that indicate that a stock
is about to head up.
The following will give you a solid grasp of the basics you need to become a pro at reading
these chart patterns.
Ascending Triangle
Double-Bottom
A double-bottom occurs when prices form two distinct lows on a chart at approximately the
same price level. Prices fall to a support level, rally and pull back up, then fall to the support
level again before increasing. A double-bottom is only complete, however, when prices rise
above the high end of the point that formed the second low.
Head-and-Shoulders Bottom
A head-and-shoulders bottom is a bullish signal that indicates a possible reversal of the
current downtrend into a new uptrend in a security’s price.
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 forms following a major downtrend in the financial instrument’s price.
Triple-Bottom
The three lows tend to be sharp. When prices hit the first low, sellers become scarce,
believing prices have fallen too low. If a seller does agree to sell, buyers are quick to buy at
a good price. Prices then bounce back up. The support level is established and the next two
lows also are sharp and quick.
Rounded Bottom
Rounded bottoms are elongated and U-shaped, and are sometimes referred to as rounding
turns, bowls or saucers. The price pattern forms a gradual bowl shape, and there should be
an obvious bottom to that bowl. While price can fluctuate or be linear, the overall curve
should be smooth and regular, without obvious spikes. The pattern is confirmed when the
price breaks out above its moving average.
As investors become more decisive about the bullishness, there is an increase in trading
volume.