Basic Chart Patterns
Cup and Handle - The cup is in the shape of a "U". The handle has a slight downward drift. The right-hand side of the pattern has low trading volume. As the stock comes up to test the old highs, the stock will incur selling pressure by the people who bought at or near the old high. This selling pressure will make the stock price trade sideways with a tendency towards a downtrend for anywhere from four days to four weeks, then it will take off.
This pattern looks like a pot with a handle
Click here for another example of a cup and handle chart.
Head and Shoulders - This is a chart formation resembling an "M" in which a stock's price:
- rises to a peak and then declines, then
- rises above the former peak and again declines, and then
- rises again but not to the second peak and again declines.
The first and third peaks are shoulders, and the second peak forms the head. This pattern is considered a very bearish indicator.
Double Bottom - This pattern resembles a "W" and occurs when a stock price drops to a similar price level twice within a few weeks or months. You should buy when the price passes the highest point in the handle. In a perfect double bottom, the second decline should normally go slightly lower than the first decline to create a shakeout of jittery investors. The middle point of the "W" should not go into new high ground. This is a very bullish indicator.
The belief is that, after two drops in the stock price, the jittery investors will be out and the long-term investors will still be holding on.