Chart Patterns

Chart patterns are formations that appear repeatedly across different stocks, timeframes, and markets. They work — to the extent they work — because they reflect recurring patterns in human psychology. Greed, fear, indecision, and capitulation leave the same fingerprints on charts whether it's 1929 or 2024. Here are the most important ones.

Head and Shoulders — the most reliable reversal

The head and shoulders pattern signals the end of an uptrend. Three peaks: a left shoulder, a higher head, a right shoulder roughly equal to the left. The "neckline" connects the two troughs. A confirmed break below the neckline signals a trend reversal — the measured target is the height of the head above the neckline, projected downward.

Double Bottom — the "W" pattern

Two lows at approximately the same level, separated by a rally. The second trough tests support and holds — sellers couldn't push it lower. A break above the middle peak ("neckline") confirms the reversal. The inverse of the double top (an "M" pattern at highs that signals a top).

Ascending Triangle — the continuation

A flat resistance line with higher lows converging toward it. Buyers are becoming more aggressive (higher lows) while sellers hold firm at the same level. Eventually buyers overpower sellers — the breakout tends to be upward and powerful, as short sellers who sold the resistance are stopped out simultaneously.

Cup and Handle

A rounded bottom (the cup) followed by a shallow consolidation (the handle), then a breakout. The cup forms over weeks or months as a stock bases after a decline; the handle is a brief pullback before the continuation. William O'Neil popularised this pattern — it's most reliable when volume surges on the breakout above the handle's resistance.