Inside Bar : Bearish Pattern

An Inside Bar (Bearish) is a Short-term Bearish Pattern which indicates a possible reversal of the current uptrend to a new downtrend. This pattern is an indication of a financial instrument's SHORT-TERM outlook. Two-bar patterns reflect changes in investor psychology that have a very short-term influence on future prices - typically less than 10 bars. Often the immediate effect is trend exhaustion and potentially, a reversal. For traders looking for clear entry and exit points, these patterns serve well. They are normally not suitable as signals for long-term investors unless viewed as monthly bars.

An Inside Bar is a reversal formation characterized by a bar that forms totally within the trading range of the preceding bar. Inside bars reflect a balance between buyers and sellers following a sharp up or down move, which is sometimes later resolved by a change in trend.

Trading Considerations

Inside Bars can be either Bullish or Bearish depending on the direction of the inbound trend. If the inbound price trend is up, then upon identification of an Inside Bar, taking a short position or selling a long position is recommended. Conversely, if the inbound price trend is down, then upon identification of an Inside Bar, taking a long position or closing a short position is recommended. Look for confirmation in a trend-line break.

The degree that the price bars and volume characteristics match this description will likely have a bearing on the strength of the post pattern price movement. Good trading practice dictates that these signals should not be used in isolation: fundamental data, sector and market indications and other technicals such as support/resistance and momentum studies should be used to support your trading decisions.

Criteria that Support

The sharper the trend preceding the pattern, the better.

The wider the first bar and its immediate predecessors in relation to previous bars, the better. This is evidence that the strong underlying momentum of the prevailing trend has climaxed and will dissipate.

The smaller the second bar relative to the broader range of the first bar, the more dramatic the change in the buyer/seller balance and therefore the stronger the signal.

Volume on the inside bar should be noticeably smaller than that of the preceding bar since it indicates a more balanced situation.

Underlying Behavior

An Inside Bar indicates a balancing of sentiment between buyers and sellers after a sustained up or down move. On the Inside Bar's second day, especially with a drop in volume, we are seeing a drop off of interest in this instrument. This balancing usually leads to a period of sideways price movement, but a reversal is possible.

Gravestone :Bearish Pattern

The Gravestone (Bearish) candlestick is a Short-term Bearish Pattern which indicates a possible reversal of the current uptrend to a new downtrend. This pattern is an indication of a financial instrument's SHORT-TERM outlook.

The Gravestone (Bearish) consists of a long Upper Shadow and no Real Body (i.e. the open is equal to the close for the session). There should be no Lower Shadow for a Gravestone.

Trading Considerations

A small Lower Shadow is acceptable.
A small Real Body is acceptable.

Criteria that Support

The longer the Upper Shadow the more significant the pattern.

Criteria that Refute

If a Lower Shadow exists and is too long then it will reduce the significance of this pattern.
If a Real Body exists and is too large then it will reduce the significance of this pattern.

Exhaustion Bar : Bearish Pattern

An Exhaustion Bar (Bearish) is a Short-term Bearish Pattern which indicates a possible reversal of the current uptrend to a new downtrend. This pattern is an indication of a financial instrument's SHORT-TERM outlook. One and two-bar patterns reflect changes in investor psychology that have a very short-term influence on future prices - typically less than 10 bars. Often the immediate effect is trend exhaustion followed by reversal. For traders looking for clear entry and exit points, these patterns serve well. They are normally not suitable as signals for long-term investors unless viewed as monthly bars.

Exhaustion Bars can develop after a rapid up or down move. They are a form of key reversal, but differ sufficiently enough to warrant their own category.

Trading Considerations

Exhaustion Bars can be either Bullish or Bearish depending on the direction of the inbound trend. If the inbound price trend is up as in this case, then upon identification of an Exhaustion Bar, taking a short position or selling a long position is recommended. Conversely, if the inbound price trend is down, then upon identification of an Exhaustion Bar, taking a long position or closing a short position is recommended.

Failure of this pattern is denoted by a price move in the wrong direction beyond the extreme point of the Exhaustion Bar.

The degree that the price bars and volume characteristics match this description will likely have a bearing on the strength of the post pattern price movement. Good trading practice dictates that these signals should not be used in isolation: fundamental data, sector and market indications and other technicals such as support/resistance and momentum studies should be used to support your trading decisions.

Criteria that Support

The price opens with a large gap in the direction of the then-prevailing trend.
The bar is extremely wide relative to the previous bars.
The opening price develops in the lower half of the bar in a downtrend and in the upper half in an uptrend.
The closing price should be both above the opening price and in the top half of the bar in a downtrend and in the lower half and below the opening in an uptrend.
The bar is completed with a gap to the left still in place.
Look for heavy volume to indicate temporary inbound trend climax.

Underlying Behavior

The presence of an Exhaustion Bar usually warns of a reversal of psychology. With a large opening gap, we are seeing the results of extreme sentiment, but as the wide trading range eats up a large part of the opening gap, and the bar ends with the gap almost closed, we have a strong indication of a sentiment reversal from bullish to bearish.

Engulfing Line : Bearish Pattern

An Engulfing Line (Bearish) is a Short-term Bearish Pattern which indicates a possible reversal of the current uptrend to a new downtrend. This pattern is an indication of a financial instrument's SHORT-TERM outlook.

The Engulfing Line (Bearish) occurs when the Real Body for a price bar is larger than the Real Body for the previous price bar. In addition, for an Engulfing Line (Bearish), the Real Body of the previous session must be White (close higher than open) and the Real Body of the second session must be Black (close lower than open).

Criteria that Support

The difference in the sizes of the two Real Bodies can be an important indicator of the significance of the Engulfing Line. If the Real Body of the previous session is substantially smaller than the Real Body of the following session then this pattern should be considered more significant. The greater the size difference the more significant the formation.

The longer and higher the inbound trend that leads into the Engulfing Line, the more significant the pattern.

Look for heavy volume on the following session. A noticeable increase in volume from the previous few sessions is a strong indication that this pattern is more significant.

If the following session "engulfs" more than one session's Real Body this pattern is very significant.

Symmetrical Continuation Triangle : Bearish Pattern

A Symmetrical Continuation Triangle (Bearish) is a Classic Bearish Pattern and considered a bearish signal, indicating that the current downtrend may continue.

A Symmetrical Continuation Triangle (Bearish) shows two converging trendlines, the lower one is ascending, the upper one is descending. The formation occurs because prices are reaching both lower highs and higher lows. The pattern will display two highs touching the upper (descending) trendline and two lows touching the lower (ascending) trendline.

This pattern is confirmed when the price breaks out of the triangle formation to close below the lower (ascending) trendline.

Volume is an important factor to consider. Typically, volume follows a reliable pattern: volume should diminish as the price swings back and forth between an increasingly narrow range of highs and lows. However, when the breakout occurs, there should be a noticeable increase in volume. If this volume picture is not clear, investors should be cautious about decisions based on this triangle.

Important Characteristics

Following are important characteristics for this pattern.

Occurrence of a Breakout
Technical analysts pay close attention to how long the Triangle takes to develop to its apex. The general rule is that prices should break out - clearly penetrate the lower trendline - somewhere between three-quarters and two-thirds of the horizontal width of the formation. The break out, in other words, should occur well before the pattern reaches the apex of the Triangle. The closer the breakout occurs to the apex the less reliable the formation.

Duration of the Triangle
The Triangle is a relatively short-term pattern. While long-term triangles do form, the most reliable triangles take between one and three months to form.

Volume
Investors should see volume decreasing as the pattern progresses toward the apex of the Triangle. At breakout, however, there should be a noticeable increase in volume.

Trading Considerations

Duration of the Pattern
Consider the duration of the pattern and its relationship to your trading time horizons. The duration of the pattern is considered to be an indicator of the duration of the influence of this pattern. The longer the pattern the longer it will take for the price to reach its target. The shorter the pattern the sooner the price move. If you are considering a short-term trading opportunity, look for a pattern with a short duration. If you are considering a longer-term trading opportunity, look for a pattern with a longer duration.

Target Price
The target price provides an important indication about the potential price move that this pattern indicates. Consider whether the target price for this pattern is sufficient to provide adequate returns after your costs (such as commissions) have been taken into account. A good rule of thumb is that the target price must indicate a potential return of greater than 5% before a pattern should be considered useful. However you must consider the current price and the volume of shares you intend to trade. Also, check that the target price has not already been achieved.

Inbound Trend
The inbound trend is an important characteristic of the pattern. A shallow inbound trend may indicate a period of consolidation before the price move indicated by the pattern begins. Look for an inbound trend that is longer than the duration of the pattern. A good rule of thumb is that the inbound trend should be at least two times the duration of the pattern.

Confirm the Breakout
To avoid taking an inadvisable position in a stock, some investors advise waiting a few days to determine whether the breakout signals that the price is ready to move. A key sign of a possible false move is low volume. If there's no pick up in volume around the breakout, investors should be wary. Typically, a good breakout from a Triangle formation will be accompanied by a definite surge in volume.

Criteria that Support

Support and Resistance
Look for a region of support or resistance around the target price. A region of price consolidation or a strong Support and Resistance Line at or around the target price is a strong indicator that the price will move to that point.

Price moves below Support Level
You can also check that the prices following the pattern have also crossed below a support level such as a 200 day moving average. This would provide extra confirmation that the trend is poised to continue downward.

Volume
A strong volume spike on the day of the pattern confirmation is a strong indicator in support of the potential for this pattern. The volume spike should be significantly above the average of the volume for the duration of the pattern. In addition, the volume during the duration of the pattern should be declining on average.

Criteria that Refute

No Volume Spike on Breakout
The lack of a volume spike on the day of the pattern confirmation is an indication that this pattern may not be reliable. In addition, if the volume has remained constant, or was increasing, over the duration of the pattern, then this pattern should be considered less reliable.

Short Inbound Trend
An inbound trend that is significantly shorter than the pattern duration is an indication that this pattern should be considered less reliable.

Price moves above Resistance Level
If post pattern prices have risen above a key resistance level such as a 200 day moving average, this could be a temporary retracement to the breakout level (which is common) or perhaps a sign that the previous bearish signal was actually a false signal - sometimes called a bear trap. When such a retracement is encountered, one helpful clue is to look at volume. If pricing retraced on high volume this may signify a failure of the original bearish pattern - sometimes leading to a potentially profitable bullish play. If there is not much volume, then it could simply be a temporary retracement and prices may change direction and continue downward after all.

Underlying Behavior
This pattern is a result of converging trendlines of support and resistance which give this Triangle pattern its distinctive shape. This occurs because the trading action gets tighter and tighter until the market breaks out with great force. Buyers and sellers find themselves in a period where they are not sure where the market is headed. Their uncertainty is marked by their actions of buying and selling sooner, making the range of the price movements increasingly tight. As the range between the peaks and troughs marking the progression of price narrows, the trendlines meet at the "apex" located at the right of the chart.

The narrowing of the trading action and the decreasing volume of trade reflect the indecision in the market. Finally consensus or decision in the market is reached and this is reflected as the price breaks out of the triangle. A spike in volume on this breakout date reflects stronger consensus that the stock should move in that direction.

Pennant : Bearish Pattern

A Pennant (Bearish) is a Classic Bearish Pattern and considered a bearish signal, indicating that the current downtrend may continue.

A Pennant (Bearish) follows a steep or nearly vertical fall in price, and consists of two converging trendlines that form a narrow, tapering flag shape. The Pennant shape generally appears as a horizontal shape, rather than one with a downtrend or uptrend.

Apart from its shape, the Pennant is similar in all respects to the Flag. The Pennant is also similar to the Symmetrical Triangle or Wedge continuation patterns however; the Pennant is typically shorter in duration and flies horizontally.

Important Characteristics

Following are important characteristics for this pattern.

Trendlines
For Pennants, the price trendlines tend to converge. At the start of the Pennant, the price spikes, perhaps in response to an unexpected and negative company announcement. Following the price spike, the price fluctuations continue until they taper out and become decreasingly less volatile. This behavior appears on a price chart with the initial price spike forming what technical analysts refer to as the "mast" of the Pennant, followed by a triangular pennant shape.

Volume
As the Pennant develops, the volume tends to decrease. Martin Pring notes in his book, Technical Analysis Explained, "a pennant is in effect a very small triangle. If anything, volume tends to contract even more during the formation of a pennant than during that of a flag." However, as with Flags, when the Pennant completes you will often observe a sharp spike in volume.

Duration of the Pattern
In his book, Technical Analysis of the Financial Markets, John J. Murphy identifies that Pennants and Flags are relatively short-term and should be completed within one to three weeks". He also notes that by comparison, the bullish patterns take longer to develop than the related bearish patterns.

Trading Considerations

Possibility of Price Reversal
In some rare cases, the price will break against the original price movement, and create a reversal trend. The pattern reversal may be signaled during the Pennant formation by an increase in volume, as opposed to the more typical decrease.

Duration of the Pattern
The duration of the pattern depends on the extent of the price fluctuations (consolidation). The greater the fluctuations, the longer a pattern will take to develop.

Target Price
It is commonly held that the length of the mast indicates the potential price increase. Like the Flag, the Pennant is considered to be a pause in a downtrend. Following the Pennant, the price typically jumps to replicate the height of the mast, while continuing in the direction of the inbound trend.

Criteria that Support

Volume
Volume should diminish noticeably as the pattern forms.

A strong volume spike on the day of the pattern confirmation is a strong indicator in support of the potential for this pattern. The volume spike should be significantly above the average of the volume for the duration of the pattern. In addition, the volume over the course of the pattern should be declining on average.

Criteria that Refute

Duration of the Pattern
According to Martin Pring, a pattern that exceeds "4 weeks to develop should ... be treated with caution". After 4 weeks, interest in the stock is likely to decrease to point that it is unlikely to continue in a strong downtrend.

No Volume Spike on Breakout
The lack of a volume spike on the day of the pattern confirmation is an indication that this pattern may not be reliable. In addition, if the volume has remained constant, or was increasing, over the duration of the pattern, then this pattern should be considered less reliable and may actually reverse.
Underlying Behavior

This pattern is effectively a pause in a downtrend. The price has moved ahead of itself with a steep decline; therefore market activity takes a break before continuing the downtrend. This pause is reflected in the decreasing trading volume. Similarly, a spike in volume marks the resumption of the downtrend.

Downside Breakout

A Downside Breakout is a Classic Bearish Pattern and considered a bearish signal, marking a breakout from a trading range to start a new downtrend.

A Downside Breakout occurs when prices break out through the bottom of a trading range and descend quickly as a new downtrend forms. It appears that the market is being flooded with sell orders. There are usually gaps throughout this activity. This pattern can last for a few days to a few weeks.

Criteria that Support

Duration of Trading Range
The duration of the trading range for which the breakout occurred can provide an indication of the strength of the breakout. The longer the duration of the trading range the more significant the breakout.

Narrowness of Trading Range
The "narrowness" of the trading range can also be used to gauge the breakout. To determine the narrowness of the trading range, compare the upper boundary with the lower boundary of the trading range. If the trading range has a small difference between the upper and lower boundary (making it narrow) then the breakout is considered stronger and more reliable.

Support and Resistance
Look for a region of support or resistance. A region of price consolidation or a strong Support and Resistance Line at or around the target price is a strong indicator that the price will move to that point.

Moving Average Trend
Look at the direction of the Moving Average Trend. For short duration patterns use a 50 day Moving Average, for longer patterns use a 200 day Moving Average. The Moving Average should change direction during the duration of the pattern and should head in the direction indicated by the pattern.

Volume
A strong volume spike on the day of the pattern confirmation is a strong indicator in support of the potential for this pattern. The volume spike should be significantly above the average of the volume for the duration of the pattern. In addition, the volume during the duration of the pattern should be declining on average.

Criteria that Refute

Duration of Trading Range
The duration of the trading range for which the breakout occurred can provide an indication of the strength of the breakout. The shorter the duration of the trading range the less significant the breakout.

Narrowness of Trading Range
The "narrowness" of the trading range can also be used to gauge the breakout. To determine the narrowness of the trading range, compare the upper boundary with the lower boundary of the trading range. If the trading range has a large difference between the upper and lower boundary (making it wide) then the breakout is considered weaker and less reliable.

No Volume Spike on Confirmation
The lack of a volume spike on the day of the pattern confirmation is an indication that this pattern may not be reliable. In addition, if the volume has remained constant, or was increasing, over the duration of the pattern, then this pattern should be considered less reliable.

Moving Average Trend
Look at the direction of the Moving Average Trend. For short duration patterns use a 50 day Moving Average, for longer patterns use a 200 day Moving Average. A Moving Average that is trending in the opposite direction to that indicated by the pattern is an indication that this pattern is less reliable.

Continuation Wedge : Bearish Pattern

A Continuation Wedge (Bearish) is a Classic Bearish Pattern and considered a bearish signal, indicating that the current downtrend may continue.

A Continuation Wedge (Bearish) consists of two converging trend lines. The trend lines are slanted upward. Unlike the Triangles where the apex is pointed to the right, the apex of this pattern is slanted upwards at an angle. This is because prices edge steadily higher in a converging pattern i.e. there are higher highs and higher lows. A bearish signal occurs when prices break below the lower trendline.

Over the weeks or months that this pattern forms the trend appears upwards but the long-term range is still downward.

Volume should diminish as the pattern forms.

Trading Considerations

Pattern Duration
Consider the duration of the pattern and its relationship to your trading time horizons. The duration of the pattern is considered to be an indicator of the duration of the influence of this pattern. The longer the pattern the longer it will take for the price to move to the Target. The shorter the pattern the sooner the price move. If you are considering a short-term trading opportunity, look for a pattern with a short duration. If you are considering a longer-term trading opportunity, look for a pattern with a longer duration.

Target Price
The target price provides an important indication about the potential price move that this pattern indicates. Consider whether the target price for this pattern is sufficient to provide adequate returns after your costs (such as commissions) have been taken into account. A good rule of thumb is that the target price must indicate a potential return of greater than 5% before a pattern should be considered useful. However you must consider the current price and the volume of shares you intend to trade. Also, check that the target price has not already been achieved.

Criteria that Support

Volume
Volume should diminish as the pattern forms.

Price moves below Support Level
You can also check that the prices following the pattern have also crossed below a support level such as a 200 day moving average. This would provide extra confirmation that the trend is poised to continue downward.

Criteria that Refute

Price moves above Resistance Level
If post pattern prices have risen above a key resistance level such as a 200 day moving average, this could be a temporary retracement to the breakout level (which is common) or perhaps a sign that the previous bearish signal was actually a false signal - sometimes called a bear trap. When such a retracement is encountered, one helpful clue is to look at volume. If pricing retraced on high volume this may signify a failure of the original bearish pattern - sometimes leading to a potentially profitable bullish play. If there is not much volume, then it could simply be a temporary retracement and prices may change direction and continue downward after all.

Rising or Stable Volume
Volume should diminish as the pattern forms. If volume remains the same or increases this signal is less reliable.

Underlying Behavior

In this pattern prices edge steadily higher in a converging pattern i.e. there are higher highs and higher lows indicating that bulls are winning over bears. However, at the breakout point the bears emerge the victors and the price descends.

Continuation Diamond : Bearish Pattern

A Continuation Diamond (Bearish) is a Classic Bearish Pattern and considered a bearish signal, indicating that the current downtrend may continue.

Diamond patterns usually form over several months in very active markets. Volume remains high during the formation of this pattern. The Continuation Diamond (Bearish) indicates a possible continuation of a downtrend.

The Continuation Diamond (Bearish) pattern occurs because prices create higher highs and lower lows in a broadening pattern. Then the trading range gradually narrows after the highs peak and the lows start trending upward.

Trading Considerations

Duration of Pattern
Consider the duration of the pattern and its relationship to your trading time horizons. The duration of the pattern is considered to be an indicator of the duration of the influence of this pattern. The longer the pattern the longer it will take for the price to move to its target. The shorter the pattern the sooner the price move. If you are considering a short-term trading opportunity, look for a pattern with a short duration. If you are considering a longer-term trading opportunity, look for a pattern with a longer duration.

Target Price
The target price provides an important indication about the potential price move that this pattern indicates. Consider whether the target price for this pattern is sufficient to provide adequate returns after your costs (such as commissions) have been taken into account. A good rule of thumb is that the target price must indicate a potential return of greater than 5% before a pattern should be considered useful. However you must consider the current price and the volume of shares you intend to trade. Also, check that the target price has not already been achieved.

Inbound Trend
The inbound trend is an important characteristic of the pattern. A shallow inbound trend may indicate a period of consolidation before the price move indicated by the pattern begins. Look for an inbound trend that is longer than the duration of the pattern. A good rule of thumb is that the inbound trend should be at least 2 times the duration of the pattern.

Criteria that Support

Support and Resistance
Support can be found at the turning point of the lows and resistance at the top peak of the Diamond.

Criteria that Refute

No Volume
A lack of a volume throughout the pattern is an indication that this pattern may not be reliable.

Short Inbound Trend
An inbound trend that is significantly shorter than the pattern duration is an indication that this pattern should be considered less reliable.

Indicators and Oscillators

Indicators
Indicators that are currently supported are based on moving average calculations.

Bullish or Bearish Indicators:

• Double Moving Average Crossover
• Price Crosses Moving Average
• Triple Moving Average Crossover

Oscillators
Oscillators are based on mathematical formulas that incorporate historical or recent prices of the stock.

Bullish or Bearish Oscillators:

• Bollinger Bands
• Commodity Channel Index
• Fast Stochastic
• KST (Short-term, Intermediate-term, Long-term)
• MACD
• Momentum
• Relative Strength Index (RSI)
• Slow Stochastic
• Williams %R