Stock Chart Patterns Within a Pattern Example

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Posted on Wed 29th Apr, 2009 11:40:31 AM

Chart patterns are leading indications of where price will be headed next. In this article we will look at two specific patterns that are bullish: bull flags or bull triangles and bullish inverted head and shoulders.

On the chart below, you can see a bull flagpole cemented into the ground on the March 18 FOMC announcement. Typically, when we see a flagpole anywhere, they are supposed to be accompanied by flags. When a president dies, the American flag is flown at “Half Mast.”

In technical analysis, a flag pattern tends to unravel after the setting of a flagpole. Flag patterns are trend continuation patterns. When the flagpole is pointed up, flags are said to be “bullish continuation patterns.” When the pattern completes, prices are then expected to resolve to the upside. Flags tend to fly at “Half Mast” or “Three Quarter Mast” (see green flags on chart below). That is, the market tends to correct either 50% or 78% of the flagpole.

stock-chart-patterns

In this example, you see a large digestion period took place from March 18 to April 13, and April 13 bottomed precisely at the 78% or what we call the “Three Quarter Mast” target for this type of pattern. Once the pattern touched the 78% retrace on Monday April 13th, the market moved sharply higher setting another minuet bull flagpole. This constitutes what is known as a “pattern within a pattern” or what other might call a “fractal.” In any event, when a bullish pattern within a bullish pattern is spotted it is usually a pretty strong signal that prices should shortly resume to the upside.

After the April 13 bull flagpole was set, we see another “bull flag” retracement fell back to the 50% Half Mast retracement on Tuesday April 14. This time, the “Half Mast” retracement proved sufficient, and once touched, prices began to move sharply to the upside again.

The astute chartist will also note a bullish inverted head and shoulders reversal pattern formed on the low of Tuesday April 14. Bullish inverted head and shoulders pattern are comprised of two shoulders and a head. The left shoulder (LS) set on Monday April 6. The head (H) set on Monday April 13 at the 78% retracement to the FOMC high. And the right shoulder (LS) set on Tuesday April 14. An astute trader would have been looking for buy setups on Tuesday April 14 if he or she had missed the entry on Monday April 13.

Is it a Confluence or a Conspiracy?

Now we have a bullish reversal pattern inside two bullish trend continuation patterns. The confluence of these mutually supportive patterns is bullishly conspiring to move 30 year prices, and the confluence of these patterns allowed the astute trader to exploit a low risk entry on the long side on Monday April 13 and again on Tuesday April 14. Is it a conspiracy or a confluence? It doesn’t matter which, the important thing is to take advantage of these pattern confluences when you see them!

John Bougearel runs website FinancialFuturesAnalysis.com, financial blog Trading Tips with John Bougearel, and is also the author of Wall Street’s Demise, Riding the Storm Out.

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