Technical Analysis Patterns Guide

John LockeJohn Locke
Locke In Your Success, LLCLocke In Your Success, LLC
Technical Analysis 101 Part 3Technical Analysis 101 Part 3
wwwwww.LearnToTradeOptionsNow.com.LearnToTradeOptionsNow.com
•© 2016 Locke in Your Success, LLC.

© 2016 Locke in Your Success, LLC.© 2016 Locke in Your Success, LLC.
Price PatternsPrice Patterns
• Many times when prices on charts consolidate before
continuing direction or prepare to reverse, they create a
“price pattern”.
• The basis of all price patterns is simply support and
resistance principles. Therefore if you know support and
resistance, identifying and understanding patterns is
easy.
• The longer a pattern takes to complete and the greater
the fluctuations in price within the pattern, the more
substantial the pattern will be if it confirms.

RectangleRectangle
• A rectangle is a consolidation of price in which the support and resistance areas are somewhat
horizontal and parallel.
• A rectangle is a shorter term sideways trend that can happen within an uptrend or a down trend.
• The rectangle is considered a NEUTRAL pattern and can act as either a continuation or a
reversal pattern however continuation of the previous trend should be assumed UNLESS the
pattern breaks in the opposite direction.
• Minimum price target should be determined by measuring the width of the rectangle and
projecting it out past the broken support/resistance.
• Volume should drop off as the pattern is forming and increase substantially as it breaks out.

Example of a rectangle in GOOGExample of a rectangle in GOOG
Volume drops off
False break out
Sudden volume increase indicates unexpected news event?
Nice, steady volume increase going into resistance
indicates high probability break out
Valid break out

Head and ShouldersHead and Shoulders
• The Head and Shoulders AND inverted Head and Shoulders patterns are among the
best known and most reliable patterns traders use. The pattern consists of a strong
rally between two smaller rallies. It is best known as a reversal pattern but is
commonly seen as a continuation pattern as well. Proper volume is critical in the
formation of the pattern. The more complex the formation, the more significant the
new trend will be when it develops.

The Anatomy of the Head and Shoulders ReversalThe Anatomy of the Head and Shoulders Reversal
• The left shoulder of the pattern should be a rally with high volume as the price nears the top of an
uptrend.
• The head is a higher rally with lower volume. This is the final rally where many of the less
educated people who were late to the party are getting in.
• The right shoulder rally should be smaller than the head and have a significant volume decrease
followed by increasing volume when price turns back down.
• Inverted head and shoulders is almost exactly opposite as the head and shoulders except that in
an inverted head and shoulders, the head rally often has greatest volume.
Longer term trend
Penultimate bull rally
Exhaustion rally
Low volume bounce
Increasing volume as price
breaks neck line

Head and Shoulders in RIMMHead and Shoulders in RIMM
Left shoulder rally
Strong Volume
Head rally
Noticeable volume decrease on last rally
Right shoulder rally
Sharp increase in volume
with neckline break
Neckline
Minimum price target

Other Head and Shoulders NotesOther Head and Shoulders Notes
• Since a trend is intact until proven otherwise, the previous trend is
still in tact during the formation of a head and shoulders pattern. It is
when and only when the neck line of the head and shoulders pattern
is broken that the trend changes.
• Head and shoulder failures: When a head and shoulders pattern
confirms and then reverses, it is usually followed by a very strong
move in the direction of the previous trend.
• A price target is obtained by measuring the distance from the neck
line to the peak of the head and then projecting it down from the
point where the price on the right shoulder breaks the neck line.

Head and Shoulders in BAHead and Shoulders in BA
Distance from neckline to peak of head
Equals distance from neckline to minimum target

Double TopsDouble Tops
• Double tops are common reversal patterns, they consist of 2 peaks that are near the
same price level.
• The second peak is sometimes slightly higher or lower than the first peak.
• Volume approaching the second peak should be lighter than when the first peak
formed and pick up as it confirms by breaking the previous low.
• Double tops sometimes extend into triple, quadruple or even a longer series of peaks
• Double bottoms are the opposite formation of the double top
• A price target is obtained by measuring the distance from the low in the formation to
the peak of the formation and then projecting it down from the point where the price
breaks the low.

Double top in MHSDouble top in MHS
Exhaustion rally
Lower volume rally
Formation low
Conformation
Retest
Height of pattern
Minimum Target

Broadening FormationsBroadening Formations
• Broadening formations occur when there is increasing volatility and 3 or more peaks
and troughs can be connected with diverging trend lines.
• The increased volatility is a result of traders becoming highly emotional.
• Broadening formations are neutral and it is difficult to tell which way they will break.
• Volume is usually erratic but tends to increase as pattern develops.
• A violation of either trend line is confirmation of the pattern.
• A broadening pattern has no price target but typically yields a “substantial” move in
the direction it breaks.
• Increased volume is essential on an upside breakout but not necessary on a
downside breakout.

Broadening formation in GMBroadening formation in GM
Increased volatility with diverging trend lines
False breakout
Breakout
Retest

Symmetrical TriangleSymmetrical Triangle
• A symmetrical triangle is a consolidation of price in which the support and resistance
areas are getting closer together.
• A symmetrical triangle can happen in an uptrend or a down trend.
• The symmetrical triangle is considered a NEUTRAL pattern and can act as either a
continuation or a reversal pattern however continuation of the previous trend should
be assumed UNLESS the pattern breaks in the opposite direction.
• Minimum price target should be determined by measuring the maximum width of the
triangle and projecting it out past the broken support/resistance.
• Volume should drop off as the pattern is forming and increase substantially as it
breaks out.
• Works best when price breaks out between ½ and ¾ the distance from the beginning
of the formation and the apex.

Symmetrical Triangle in TSSymmetrical Triangle in TS
Dropping Resistance
Rising Support
Volume Decrease
• Pattern is waiting for a high
volume break in either direction.
This pattern in particular is near
becoming invalid however as we
generally do not like to see the
price this deep into the triangle.
Bullish Target
Bearish Target

Ascending TriangleAscending Triangle
• An Ascending Triangle is a consolidation of price in which the support area is rising and the
resistance area is somewhat horizontal.
• An Ascending Triangle is a bullish pattern. It can be either a bullish continuation pattern or a
bullish reversal pattern.
• Minimum price target should be determined by measuring the maximum width of the triangle and
projecting it out past the broken resistance.
• Volume should drop off as the continuation pattern is forming and increase substantially as it
breaks out.
• Volume may tend to increase if a reversal pattern is forming and stay high or increase as it
breaks out.
• Works best when price breaks out between ½ and ¾ the distance from the beginning of the
formation and the apex.

Ascending Triangle Continuation in MRKAscending Triangle Continuation in MRK
Horizontal Resistance
Rising Support
Break Out
Retest

Ascending Triangle Reversal in ABTAscending Triangle Reversal in ABT
Horizontal Resistance
Rising Support
Break Out
NO VOLUME!! Breakout likely to fail

Descending TriangleDescending Triangle
• A descending triangle is a consolidation of price in which the resistance area is
dropping and the support area is somewhat horizontal.
• A Descending Triangle is a bearish pattern. It can be either a bearish continuation
pattern or a bearish reversal pattern.
• Minimum price target should be determined by measuring the maximum width of the
triangle and projecting it out past the broken support.
• Volume should drop off as the continuation pattern is forming and increase
substantially as it breaks out.
• Volume may tend to increase if a reversal pattern is forming and stay high or increase
as it breaks out.
• Works best when price breaks out between ½ and ¾ the distance from the beginning
of the formation and the apex.

Descending Triangle Continuation Set Up in NSCDescending Triangle Continuation Set Up in NSC
Dropping Resistance
Horizontal Support
Volume Drops as pattern forms

Descending Triangle Reversal in CVXDescending Triangle Reversal in CVX
Descending Support
Horizontal Support
Relatively High Volume at top of trend when
pattern is forming is bearish

Rising WedgeRising Wedge
• A rising wedge is a consolidation of price where both the resistance and the
support are rising and the support is rising at a more rapid rate than the
resistance.
• A rising wedge is a bearish continuation pattern that forms during a down
trend.
• Minimum price target should be determined by measuring the maximum
width of the wedge and projecting it down past the broken support.
• Volume should drop off as pattern is forming and increase as it breaks out.

Rising Wedge in BAXRising Wedge in BAX
Rising Resistance
More Rapidly Rising Support

Falling WedgeFalling Wedge
• A falling wedge is a consolidation of price where both the resistance and the
support are dropping and the resistance is dropping at a more rapid rate
than the support.
• A falling wedge is a bullish continuation pattern that forms during an up
trend.
• Minimum price target should be determined by measuring the maximum
width of the wedge and projecting it up past the broken resistance.
• Volume should drop off as pattern is forming and increase as it breaks out.

Falling Wedge in HPQFalling Wedge in HPQ
Falling Support
More Rapidly Falling Resistance
Dropping Volume
Volume increase on breakout

FlagsFlags
• A flag is a consolidation that occurs after a larger price move sometimes in
the opposite direction of the trend.
• A flag is a continuation pattern.
• A flag in an uptrend is a bull flag.
• A flag in a down trend is a bear flag.
• Price target is determined by measuring the previous rally and projecting the
price up from where it breaks out of the pattern.
• Volume should drop off as the pattern forms and increase as it breaks out.

Bull Flag in AXPBull Flag in AXP

Series of Bear Flags in GMSeries of Bear Flags in GM

PennantsPennants
• A Pennant is basically a flag with
converging trend lines and looks like a
small symmetrical triangle or a small
wedge.

Pennant in SRCLPennant in SRCL

Cup and HandleCup and Handle
• A Cup and Handle is a patterns that consists of 2 parts, a cup and a handle.
The cup consists of a correction from the previous trend which gradually
reverses back to the prevailing trend forming a saucer like contour. The
handle forms after the saucer and typically looks like a flag pattern.
• The Cup and Handle is a continuation pattern. An upright cup and handle is
bullish in an uptrend while an inverted cup and handle is bearish in a
downtrend.

Multiple Cup and Handles in JDSUMultiple Cup and Handles in JDSU

GapsGaps
• A Gap is created when there is a price difference between a closing price
and the following opening price.
• Gaps are a result emotional trading often related to some sort of news event
where there is a surge of buyers or sellers who want in or out regardless of
price.
• Gaps sometimes act as support or resistance.
• Gaps that occur completely inside of a price pattern or do NOT break a
support or resistance level tend to reverse and the price will usually fill the
gap.
• Gaps that DO break a price pattern or a major support or resistance area
tend to continue and often create or reinforce a support or resistance level.
• Three types of gaps are: Break Away Gaps, Run Away Gaps and
Exhaustion Gaps

Break Away GapBreak Away Gap
• A Break Away Gap happens when the price gaps out of a price
pattern or support/resistance area.
• A Break Away Gap should have high volume for an upside
breakout.
• High volume is preferred but is not needed for a downside breakout.
• Price Target would be the same as the target of the pattern it broke
out of.

Break Away Gap in WMTBreak Away Gap in WMT
Price Gapped out of triangle
Huge Volume Confirmation
The price gapped down to the target of the
pattern, which also coincided with a
previous low, and then reversed. This
creates a reinforces the support level
and would make a bearish trade risky
until this support is broken.
Support break, go
bearish

Run Away GapRun Away Gap
• Run Away Gaps occur when a price move in a particular direction is
already underway and a gap occurs.
• Run Away Gaps reinforce the emotion behind the current price
move.
• Price target can be determined by measuring the move before the
gap and measuring that same distance up past the gap area. In
other words the gaps often occurs ½ way between the start and the
end of the move.

Run Away Gap in RIMMRun Away Gap in RIMM
Run Away Gaps
Established Up Trend
Volume Confirmation
Measure here = about $35
Target Here about +$35

Exhaustion Gaps and IslandsExhaustion Gaps and Islands
• Exhaustion gaps occur at the end of a trend, usually when the price
is extremely over bought or over sold.
• Exhaustion gaps can be an indication of a trend reversal.
• Islands happen when there is a gap in one direction followed by a
gap in the opposite direction.

Exhaustion Gap in MSFTExhaustion Gap in MSFT
Exhaustion Gap
Island
Break Away Gap

• John Locke
• www.lockeinyoursuccess.com
• john@lockeinyoursuccess.com
• Facebook: Locke in Your Success
• Twitter: locke4success
• 603-738-1795
Locke In Your Success, LLCLocke In Your Success, LLC
© 2016 Locke in Your Success,© 2016 Locke in Your Success,
LLC.LLC.

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