Module 19: The Shapes of Sentiment - Chart Patterns
If support and resistance are the geometry of a chart, Chart Patterns are the "shapes" that tell a story about what will happen next. They act as a visual shorthand for human behavior, identifying whether a trend is taking a breather or preparing to reverse.
1. Reversal Patterns: The "U-Turn"
These signal that the current trend is exhausted.
- Head and Shoulders (Bearish): One of the most reliable reversal signals. It features three peaks: a left shoulder, a higher "head," and a right shoulder. The "Neckline" acts as support; when price breaks below it, the bull trend is dead.
- Double Top ("M" shape): Price attempts to break a resistance ceiling twice, fails, and collapses.
- Double Bottom ("W" shape): Price tests a support floor twice and bounces back strongly.
2. Continuation Patterns: The "Pit Stop"
These suggest the market is consolidating before resuming its original direction.
- Flags & Pennants: Represent sharp consolidations after a massive "flagpole" price move. Flags look like small rectangular channels sloping against the trend; Pennants look like small symmetrical triangles.
3. The "Three-Point Check"
In a high-volatility US market, simply identifying a shape is insufficient. You must confirm the breakout:
- The Shape: Does it clearly resemble the pattern?
- The Breakout: Wait for a daily candle to close completely outside the pattern boundaries.
- The Volume: A valid breakout must be accompanied by a massive spike in trading volume. If volume is low, it is likely a "Fakeout" algorithm trap.
Self-Assessment Quiz
- What does a "Double Bottom" pattern indicate about an ongoing Bear market trend?
- Why is trading volume critical to confirming a breakout from a chart pattern?