Encyclopedia of Chart Patterns (Thomas N. Bulkowski, 2000)

Broadening Bottom

• Compute the difference between the highest high and the lowest low in the formation. Add or subtract this value from the most recent minor high or low, respectively. The result is the target price for upward and downward breakouts.
• Once recognizing a broadening formation, buy after the stock makes its turn at the lower trend line.
• Place a stop-loss order 0.15 below the minor low to protect against a trend reversal.
• Sell short after prices start heading down from the top trend line.
• Place a stop 0.15 above the minor high to protect against an adverse breakout. Cover the short when price turns at the bottom trend line and starts moving up. For a downward breakout, cover as it nears the target price or any support level.
• Raise or lower the stop to the next closest minor low or high once prices make a new high (for long trades) or low (for short sales).
• If a broadening bottom shows a partial decline or rise, trade accordingly (on a partial decline, go long; on a partial rise, short the stock).

Broadening Formations, Right-Angled and Ascending

• Compute the formation height from highest high to the horizontal trend line. For upward breakouts, add the height to the highest high in the pattern. For downward breakouts, subtract the height from the value of the horizontal trend line. The result is the target price. More accurate targets use a formation height divided by 2.
• Use a partial rise or decline as an entry signal.
• If you own the stock and prices close below the lower trend line, sell.
• For tall patterns, buy near the lower trend line and sell near the top as prices curl down.

Broadening Formations, Right-Angled and Descending

• Compute the formation height by taking the difference between the horizontal top and the lowest low in the formation. For upward breakouts, add the result to the value of the horizontal trend line. For downward breakouts, subtract the value from the lowest low. The result is the expected target price.
• It is unclear which way prices will break out, so it is best to wait for prices to close outside the trend lines. Once they do, expect prices to continue moving in the direction of the breakout. Place your trades accordingly.
• Once a breakout occurs, consider the opposite side of the formation as the stop-loss point. However, in many cases you will want something closer to your purchase price, so look for nearer support or resistance zones. Once the stock moves substantially, advance the stop to the break-even point or higher.
• For aggressive traders, consider placing a trade as prices reverse course at the trend line. Go long at the bottom and short at the top, but be sure to use stops to protect against an adverse breakout.
• Short a stock if you see a partial rise once prices curl around and begin heading back down in a bear market.

Broadening Tops

• Compute the height between the highest high and the lowest low in the formation. Add or subtract the height from the highest high or lowest low, respectively. The results are the target prices for upward and downward breakouts.
• Once a broadening top appears, buy after the stock makes its turn at the low.
• Place a stop-loss order 0.15 below the minor low. Should the stock reverse course, you will be protected.
• Sell short after prices start heading down at the top.
• Place a stop 0.15 above the minor high to protect against an adverse breakout. Cover the short when it turns at the bottom trend line and starts moving up. For a downward breakout, cover as it nears the target price or any support level.
• Go long if a broadening top shows a partial decline. Consider adding to your position once it makes an upward breakout.

Broadening Wedges, Ascending

• For downward breakouts, use the lowest price in the formation as the minimum price move to expect. For upward breakouts, use the formation height added to the breakout price.
• Although this formation breaks out downward 73% of the time, it is best to wait for a downward breakout before shorting the stock.
• If a stock shows a partial rise and begins to head back toward the lower trend line, consider selling short. A downward breakout follows a partial rise.

Broadening Wedges, Descending

• For upward breakouts, use the highest high. For downward breakouts, use the pattern height subtracted from the lowest low in the pattern. However, that strategy works only 32% to 36% of the time.
• Wait for prices to close beyond the trend lines before placing a trade.
• If a stock shows a partial decline from the top trend line and begins to head back up, consider going long. An upside breakout most often follows a partial decline.
• If the formation is especially broad, buy at the lower trend line and sell at the top. If the stock executes a partial rise and begins falling, close out the position as it may break out downward. Alternatively, sell short at the top trend line once prices are heading down and close the position after it rebounds off the lower trend line.
• For intraformation trading, place a stop on the other side of the trend line, just to catch an adverse breakout. Move the stop as prices cross the formation. Pick areas showing support or resistance.

Bump-and-Run Reversal Bottoms

• The highest high in the pattern is the target.
• Waiting for the breakout improves investment performance. The close should be above the down-sloping trend line before you buy the stock.
• When prices rise to the old high, consider selling if the stock shows weakness.
• Place a stop 0.15 below prior resistance. As prices rise, raise the stop.

Bump-and-Run Reversal Tops

• Compute the lead-in height and subtract the result from the breakout price. The result is the minimum price move to expect. About 8 out of 10 stocks meet their price targets.
• Drawn parallel to the trend line and lead-in height above it. The line warns that the stock is making a move and is entering the sell zone, an area between the warning and sell lines.
• A second trend line parallel to the warning line and lead-in height above it. Consider selling when prices touch the sell line, especially if the bump is narrow. Delay selling if prices continue moving up. Draw additional lines parallel to the original trend line and lead-in height above the prior line. When the stock rounds over and touches the lower trend line, sell it.

Cup with Handle

• Compute the formation height by subtracting the lowest low reached in the cup from the high at the right cup lip. Add the difference to the high at the right cup lip and the result is the target price to which prices will climb, at a minimum. Only 50% of the formations rise that far in a bull market; 27% hit the target in a bear market. Use half the cup height to get a more realistic price target (met 76% of the time in a bull market; 55% in a bear market).
• If you discover a cup within a cup, buy on the breakout of the inner cup (when prices rise above the inner cup lip). Be prepared to sell at the price of the old high.
• Place a stop-loss order 0.15 below the handle to limit losses. Raise the stop to breakeven or just below the nearest support zone when prices rise.

Cup with Handle, Inverted

• Compute the handle height then subtract it from the price of the right rim low. Warning: This only works about half the time.
• Look to the left of the cup to see if another handle appears. If so, this might be a head-and-shoulders top with a fat head and two handles as shoulders.
• When price closes below the right rim low, short the stock.
• If prices decline quickly, several points in a few days (almost vertical), consider closing the short position. Prices usually rebound after such quick declines.
• Draw a trend line down from the handle. When price closes above the trend line, cover your short.
• The handle may be the corrective phase of a measured move down (MMD). Sell when prices near the amount of the first leg decline.

Diamond Bottoms

• Measure the diamond height from the highest high to the lowest low and then add the result to the breakout price if the breakout is upward; subtract the result from the breakout price for downward breakouts. The result is the target price.
• Prices often return to the base following a quick rise or fall preceding the diamond.
• The diamond can break out in any direction, so wait for the breakout.

Diamond Tops

• Prices trend up to the formation. With this definition, diamond tops need not form at the top of a price chart—they can form anywhere.
• Prices form higher highs and lower lows (widening appearance), then lower highs and higher lows (narrowing appearance). Trend lines surrounding the minor highs and lows resemble a diamond. The diamond need not appear symmetrical.
• Diminishing over the length of the formation.
• Usually high and it can continue high for several days.
• The formation creates a location for support or resistance. Diamond tops usually show SAR near the top of the formation. SAR duration can last up to a year or more.

Double Bottoms, Adam & Adam

• Compute the height from the highest high between the two bottoms to the lower of the two bottoms then add the difference to the highest high. The result is the target price.
• Always wait for confirmation (a close above the highest high).
• To improve your odds, trade this bullish pattern in a bull market.
• Are other stocks in the same industry showing bottoming patterns?
• Initiate or add to your position once price starts rebounding after a throwback.

Double Bottoms, Adam & Eve

• Price trends downward and should not drift below the left bottom.
• Narrow, V-shaped, perhaps pointed-looking left bottom (Adam), sometimes composed of a long, one- or two-day spike. The right (Eve) bottom appears rounded and wider.
• At least 10% from the lowest valley to the highest peak between the two bottoms. Taller patterns perform better.
• Bottom to bottom price variation is small. Patterns with a lower right bottom perform better.
• Bottoms should be at least a few weeks apart. Best performance is 2–6 weeks apart. Patterns wider than 8 weeks see performance deteriorate.
• Price must close above the confirmation point without first falling below the right bottom low.
• Usually higher on the left bottom than the right. Bottoms with higher left volume perform better.
• The highest high between the two bottoms. A close above the confirmation point is the breakout and confirms the pattern as a valid double bottom.

Double Bottoms, Eve & Adam

• Price trends downward and should not drift below the left bottom.
• The left bottom (Eve) should be wide and rounded. The right bottom (Adam) should be narrow and V shaped, perhaps with one or two downward spikes.
• At least 10% from the lowest valley to the highest peak between the two bottoms.
• Bottom to bottom price variation is small. Best performance is between 0% and 4% variation.
• Bottoms should be at least a few weeks apart. Best performance is 2–7 weeks apart. Wider than 7 weeks and performance deteriorates.
• Price must close above the confirmation point without first falling below the right bottom low.
• Evenly split between right or left bottom showing heavier volume.
• The highest high between the two bottoms. A close above the confirmation point is the breakout and confirms the pattern as a valid double bottom.
• Heavy breakout volume is best.

Double Bottoms, Eve & Eve

• Compute the pattern height from the highest high between the two bottoms to the lowest bottom low. Add the difference to the highest high. The result is the target price. Price hits the target 67% of the time in a bull market, 54% in a bear market.
• Wait for a close above the confirmation point before buying. If you see a flat shelf on the right bottom, trade it.
• For best results, buy in a bull market.
• To avoid 5% failures, check other stocks in the same industry and buy if they are showing bottoming patterns or if their stock is rising.

Double Tops, Adam & Adam

• Compute the pattern height from the lowest low between the two tops to the highest peak and then divide in half. Subtract the result from the lowest low. The result is the target price. Price hits the target 72% of the time in a bull market, 68% in a bear market.
• Wait for a close below the confirmation point before selling— usually.
• For best results, short in a bear market.
• To avoid 5% failures, check other stocks in the same industry and trade if they are showing topping patterns or if their stock is falling.

Double Tops, Adam & Eve

• Compute the pattern height from the lowest low between the two tops to the highest peak then divide by 2. Subtract the result from the lowest low. The result is the target price. Price hits the target 69% of the time.
• Wait for a close below the confirmation point before selling— usually.
• For best results, short in a bear market.
• To avoid 5% failures, check other stocks in the same industry and go short if they are showing topping patterns or if their stock is falling.

Double Tops, Eve & Adam

• Compute the pattern height from the lowest low between the two tops to the highest peak then divide in half. Subtract the result from the lowest low. The result is the target price. Price hits the target 72% of the time in a bull market, 79% in a bear market.
• Wait for a close below the confirmation point before selling— usually.
• For best results, short in a bear market.
• To avoid 5% failures, check other stocks in the same industry and trade if they are showing topping patterns or if their stock price is falling.

Double Tops, Eve & Eve

• Compute the pattern height from the lowest low between the two tops to the highest peak then divide in half. Subtract the result from the lowest low. The result is the target price. Prices hit the target 73% of the time in a bull market, 76% in a bear market.
• Wait for a close below the confirmation point before selling— usually.
• For best results, short in a bear market.
• To avoid 5% failures, check other stocks in the same industry and trade if they are showing topping patterns or if their stock is falling.
• If you can determine when the stock bottoms or if the pattern busts, then buy.

Flags

• Calculate the price difference between the start of the trend and the formation. Prices should move at least this amount above (for uptrends) or below (for downtrends) the end of the formation.
• Once prices move outside the trend-line boundaries, place the trade.

Flags, High and Tight

• Measure the rise leading to the flag and project half of it upward, using the flag low price.
• If prices break out of the flag portion, buy the stock. If you cannot tell if a breakout has occurred, wait for price to rise above the highest high in the flag.

Gaps

Head-and-Shoulders Bottoms

• Compute the formation height by subtracting the value of the lowest low reached in the head from the neckline, measured vertically. Add the difference to the point where prices pierce the neckline. The result is the target price to which prices will rise, at a minimum. For up-sloping necklines, substitute the rise between the head and right shoulder (that is, the highest price in the rise) for the neckline breakout price.
• If you can determine that a head-and-shoulders formation is completing, consider buying the stock. This formation rarely disappoints and the rise is worth betting on. However, you must be sure that a head-and-shoulders bottom is present. Otherwise, wait for price to close above the neckline or highest high.
• Place a stop-loss order below the lower of the two shoulders. Often, prices drop to the shoulder lows before meeting support. Raise the stop as prices climb.
• If you miss the upward breakout, wait. Half the time, the stock will throw back to the neckline. Once it does, buy the stock or add to your position.

Head-and-Shoulders Bottoms, Complex

• Compute the formation height by subtracting the lowest low reached in the head(s) from the neckline, measured vertically. Add the result to the breakout price where prices pierce the neckline. The value is the minimum target price.
• Trade the inner HSB. That approach will allow you to get in at a good price. See Chapter 24 on head-and-shoulders bottoms for specific trading hints.
• Stocks sometimes decline to the lowest of the right shoulders then turn around. Look for support areas near the shoulders. Place a stop-loss order 0.15 below the lowest shoulder or head.
• Buy or add to the position during a throwback. Wait for prices to finish falling before placing the trade as prices sometimes throw back and continue moving down.

Head-and-Shoulders Tops

• Compute the formation height by subtracting the value of the neckline from the highest high reached in the head, measured vertically. Subtract the result from the breakout price where prices pierce the up-sloping neckline, or, if the neckline slopes downward, closes below the right shoulder low. The result is the minimum target price to which prices descend. Alternatively, compute the formation height from the highest high to the daily low price in the higher of the two troughs. Subtract the result from the daily high price in the higher of the two troughs to get the target price. This method boosts the success rate and does not rely on the neckline or breakout point (useful for steep necklines).
• Play it safe: Wait for price to confirm the pattern by closing below the neckline or right shoulder low.
• For short sales, place a stop just above the lower of the two troughs or just above the neckline, whichever is higher.
• Initiate a short sale or add to your position during a pullback. Wait for prices to begin falling again before placing the trade as prices sometimes pull back and continue moving up.

Head-and-Shoulders Tops, Complex

• Compute the formation height by subtracting the neckline value from the highest high reached in the head, measured vertically. Subtract the result from the breakout price where price pierces the neckline. The result is the minimum target price. If the formation looks like a mountain suddenly appearing out of a flat base, prices may return to the base.
• If a simple head-and-shoulders pattern confirms, consider trading it without waiting for the CHST to confirm. Place a short trade or sell any long commitments. This formation rarely disappoints and the decline is above average.
• Look for resistance areas about the neckline troughs. Place a stop just above the higher shoulder trough. The shoulder tops and head also represent good locations for stop-loss orders.
• Place a short sale or add to the position during a pullback. Wait for prices to begin falling again before placing the trade as prices sometimes pull back and continue moving up.

Horn Bottoms

• Subtract the highest high from the lowest low in the horn pattern and add it to the highest high. The result is the target price.
• Use the characteristics outlined in Table 28.1 to correctly identify a horn bottom. The week after the right horn is key. Prices should climb smartly and the weekly low should not be anywhere near the horn low (in other words, the horn should still look like a horn and not be encroached on by the succeeding price action).
• Some horns appear near the end of uptrends, so watch for the trend to change.
• Horns will usually not mark the end of the downtrend, but they will be close. Prices might continue to drift down for $1 or so (below the lowest horn low) and then head upward.
• If you can afford the loss, place a stop $1 below the lowest horn to reduce the chance that a retest of the low will stop you out.

Horn Tops

• Subtract the lowest low from the highest high to get the pattern height. Subtract the height from the lowest low to get the target price.
• Look for an uptrend spanning many months. Such uptrends often show horns near the end of the trend. If the horn top appears near the end of a long downtrend, then it is best to avoid it. Watch out for horns appearing after a downward trend when the trend changes and price starts moving higher. Prices may decline but the decline is usually short-lived (as in the rise between a double bottom).
• The failure rate declines if below average volume appears on both spikes, in a bull market.
• A horn top usually signals an approaching trend change, usually in less than 2 months.

Island Reversals

• Compute the formation height by subtracting the lowest low from the highest high in the formation. Add the difference to the highest high for island bottoms, and subtract the difference from the lowest low for island tops. The result is the target to which prices should rise (for bottoms) or fall (for tops).
• Island reversals show a reluctance to continue moving in the direction of the breakout. Prices usually reverse direction and quickly fill the gap before recovering and resuming their original trend. Wait for the pullback (tops) or throwback (bottoms) to complete and prices to resume their original direction before investing.
• Trend lines, when pierced, often signal a trend change. Should an island reversal appear near a trend line, wait for prices to close beyond the trend line before investing.

Islands, Long

• Compute the formation height from highest high to lowest low. Divide by 2. Apply the height to the closing price the day before the second gap. The result is the target price.
• Islands that appear well into the trend and are unusually narrow may signal a coming trend change.
• Trade in the direction of the general market and other stocks in the same industry.
• Be prepared to take profits quickly except for islands in a bull market with upward breakouts.

Measured Move Down

• The second leg averages 19% shorter than the first leg, so expect the actual price to fall short of the target. Compute the length of the first leg from the highest high to the lowest low (at the start of the corrective phase). Subtract the result from the highest high reached in the corrective phase to get the target price. For a more conservative target, use half of the first leg height. This shortened height means that prices hit the target 83% (bull market) to 93% (bear market) of the time.
• Short the stock as soon as it becomes clear that a measured move is in progress. If prices rise above the corrective phase high, then close out your position. Prices occasionally will rise up to the corrective phase high a second time before ultimately declining, so put your stop about 0.15 above the high.
• Cover your short when the price drops to a support area and meets resistance to a further decline, especially if prices near the measure rule target.
• The corrective phase shows future support or resistance.

Measured Move Up

• Calculate the height of the first leg from highest high to lowest low. Add the difference to the lowest low in the corrective phase. The result is the expected target price. For a more conservative measure, use half the first leg height. Decide if the predicted move is worth the risk of a trade.
• Take a position in the stock sometime after the corrective phase completes and prices rise during the second leg.
• The corrective phase shows future support or resistance.

Pennants

• Calculate the price difference between the start of the trend and the pennant. Prices should move at slightly less than this amount above (for uptrends) or below (for downtrends) the end of the pennant.
• Take a position in the stock once price closes outside the pennant boundary.
• Close out the trade when price stalls, usually as it approaches the measure rule target or a support/resistance zone.

Pipe Bottoms

• Many of the best performing pipes show a downward price trend leading to the formation. Pipes often occur at the bottom of a retrace in an upward price rise or mark the end of an extended price decline.
• After a pipe bottom passes the identification characteristics buy the stock.
• Pipes act as support zones but prices sometimes dip up to half a point below the pipe low, so use that as your stop-loss point. Raise your stop as prices climb.
• Wait for price to close above the highest high in the pattern.

Pipe Tops

• Measure the height of the pipe and subtract it from the breakout price.
• The best performing pipes occur during downtrends. Prices bounce upward, form a pipe, and then resume their downward trend.
• Do not invest if the pipe appears after a long downtrend. The pipe may signal the end of the trend.
• Look at long-term uptrends. If a pipe appears in an uptrend of a year or more, then the pipe might signal a trend reversal. Be careful as the pipes sometimes are premature by 2 to 5 months.
• Pipes often appear in uptrends. They mark short-term weakness where the trend reverses and moves down. These can be profitable short-term moves.

Rectangle Bottoms

• Measure the height of the rectangle by subtracting the value of the trend lines from each other. For upward breakouts, add the height to the top trend line; for downward breakouts, subtract the value from the bottom trend line. The result is the expected minimum price move. For a maximum price target, measure the length of the rectangle and extend it vertically above the top trend line (for upward breakouts) or below the bottom one (downward breakouts). The price then becomes the maximum expected move.
• Since you cannot be sure in which direction a rectangle will break out, wait for price to close outside the trend line before trading in the direction of the breakout.
• If the rectangle is tall enough, sell or sell short near the top trend line and buy or cover near the bottom trend line.
• If you have a downward breakout, watch for a pullback and short the stock or add to your short position once prices begin descending again. Use the same technique for an upward breakout: Wait for the throwback then initiate or add to your position when prices rise.
• Watch for rectangles forming as the corrective phase of a measured move formation and adjust the target price accordingly. Rectangle reversals sometimes appear as flat bottom formations.

Rectangle Tops

• Measure the height of the rectangle from trend line to trend line. For upward breakouts, add the height to the top trend line; for downward breakouts, subtract it from the bottom trend line. The result is the minimum expected move. For a maximum price target, measure the length of the rectangle and extend it vertically above the top trend line (for upward breakouts) or below the bottom one (downward breakouts). The price becomes the maximum expected move.
• More than two out of three rectangles act as consolidations of the prevailing trend. Expect the breakout to continue the trend.
• Since you cannot be sure in which direction a rectangle will break out, wait for prices to close outside the trend line before trading in the direction of the breakout.
• If the rectangle is tall enough, sell or sell short near the top trend line and buy or cover near the bottom one.
• Watch for rectangles forming as the corrective phase of a measured move up formation and adjust the target price accordingly. Rectangle reversals sometimes appear as flat top formations.

Rounding Bottoms

• Subtract the lowest low from the right saucer lip. Add the difference to the value of the right saucer lip to get the target price. This is the minimum price move to expect. The measure rule only works about half of the time, so be conservative and lower your target.
• Wait for prices to rise (close) above the left or right saucer lip before buying, whichever is at a lower price.
• Many times prices will reach the level of the left saucer lip then dip to form a handle. Buy when prices rise above the right saucer lip (or pierce a handle trend line moving up).

Rounding Tops

• Compute the formation height by subtracting the right rim low from the formation high. Add the difference to the high for upward breakouts or subtract the difference from the right rim low for downward breakouts to get the target price.
• Buy when prices close above the dome high, or below the right rim low.
• For a more risky but profitable trade, buy when prices rise above the right dome low by at least 30% of the formation height.
• The right rim low shows support. If prices throw back to this level and continue down, sell or sell short.

Scallops, Ascending

• Compute the height of the scallop by taking the difference between the right-edge high to the lowest low in the formation. For upward breakouts, add the difference to the highest rightedge high. For downward breakouts, subtract the difference from the lowest low. The result is the minimum expected price target.
• Once prices crest the right lip high, they fall. If they drop below the bottom of the formation, then the breakout is downward.
• Take a position in the stock once prices drift below the right-edge high and bottom out.
• $0.15 below the lowest low.

Scallops, Ascending and Inverted

• Trend lines, chart pattern boundaries, minor highs and minor lows, round numbers, and horizontal consolidation regions all contribute to support and resistance zones.
• Do you have a valid pattern?
• Used to predict a target price. Take the difference between the scallop’s high and low. Add this difference to the scallop’s high. The result is the target price.
• Buy only after price closes above the formation high.

Scallops, Descending

• Compute the scallop height by taking the difference between the highest high and lowest low in the pattern. Add the result to the right scallop peak for upward breakouts or subtract it from the lowest low for downward breakouts to get the target price. This tactic works only about 33% of the time.
• A close above the right lip high marks an upward breakout and a close below the lowest low is a downward breakout.
• For upward breakouts, place the stop below the lowest low in the pattern. For downward breakouts, place the stop slightly above the right lip high. Move the stop as prices advance.
• Trade with the market trend, especially downward breakouts in a bear market.

Scallops, Descending and Inverted

• Used to predict a target price. Compute the difference between the formation’s high and low. Subtract the difference from the breakout price (the lowest low). The result is the target price.
• Occurs when price closes below the lowest low in the pattern without first rising above the high. That is the time to open a short position or sell a long holding.
• If price rises to the price level of the start of the pattern, consider closing out your short position. If it rises above the pattern high, get out of the trade. Now!
• Avoid nearby underlying support. Look for minor highs and lows, solid blocks of horizontal price movement, round numbers, trend lines, and chart pattern support and resistance.
• Wait for price to close below the formation low.

Three Falling Peaks

• Works about a third of the time to predict a target price. Compute the formation height from the highest high to lowest low in the pattern and then subtract the result from the lowest low.
• Before trading, check for support zones and avoid trading a stock with nearby support.
• If the first valley is below the second, use the second one as the confirmation price instead of the lowest low in the pattern.
• Draw a trend line connecting the two valleys. If it slopes upward, then a close below the line signals a breakout and confirms the pattern.
• Wait for price to close below the breakout (the lowest low or trend-line break) before shorting the stock.

Three Rising Valleys

• Compute the formation height (highest high minus lowest low) and add it to the breakout price. The result is the target price.
• If you can tell that the end of a downtrend has arrived, buy the stock.
• If the pattern has the highest high between the first two valleys, use the last peak in the chart pattern as the breakout price.
• A close above a down-sloping trend line joining the highs between the valleys can serve as the breakout price.
• Wait for price to confirm the pattern. Usually this event is a close above the highest high.

Triangles, Ascending

• Compute the height of the formation at the start of the triangle. Add the result to the price of the horizontal trend line (upward breakout) or subtract it from the break price (downward breakout). The result is the minimum price target.
• Buy the stock when price closes beyond the trend line.
• For short-term traders, sell when price nears the target (see measure rule). For intermediate- and long-term traders, hold the stock until fundamentals or market conditions change.
• If you own the stock and it breaks out downward, sell. If you do not own it, sell it short. Should the stock pull back, that is another opportunity to sell, sell short, or add to your short position.
• If you short the stock and an ascending triangle appears, you have a 43% chance that it will break out downward. Cover the short immediately if it breaks out upward.

Triangles, Descending

• Calculate the height of the formation by subtracting the highest high from the lowest low. Subtract the height from the value of the lower trend line to get the predicted minimum price decline. Alternatively, draw a line parallel to the down-sloping trend line starting at the lower left corner of the formation. The value of this line where prices break out of the formation becomes the target price. For upward breakouts, add the height to the price where it pierces the top trend line.
• Since the breakout direction is unknown, always wait for the break-out to occur. After a downward breakout, sell short immediately or after prices pull back to the triangle base and start moving down again. Another way to play the formation is to wait for an upward breakout then buy the stock.
• If you are a short-term trader, sell immediately should the stock break out downward. The likelihood is that prices will continue down. For intermediate- or long-term holders who do not want to sell, consider adding to your position once prices near the measure rule target. Use support levels to help predict the ultimate low.
• For short-term traders, cover your short positions when prices near the target price (see measure rule).

Triangles, Symmetrical

• Compute the formation height by subtracting the lowest low from the highest high. For upward breakouts, add the difference to the highest high or for downward breakouts, subtract the difference. Alternatively, symmetrical triangles can be halfway points in a move, so project accordingly.
• As consolidations, prices usually leave the triangle in the same direction as when they enter.
• Always wait for the breakout in case the triangle reverses.
• If a triangle breaks out and moves less than 5% or so, then returns and breaks out in the opposite direction, trade it in the new direction.
• If the triangle is tall and long enough, sell or go short at the top trend line and buy or cover at the bottom one. Cover at the breakout if it goes against you, or stop trading once prices near the apex.

Triple Bottoms

• Compute formation height from highest high to lowest low in the formation. Add the height to the highest high. The result is the expected minimum price move.
• Since most triple bottom formations continue heading down, always wait for price to rise above the highest high reached in the formation (the confirmation point).
• Draw a line connecting the highs. If it slopes down, buy when price closes above it.
• Almost two-thirds of the formations throw back to the breakout price, so consider waiting for the throwback before investing or adding to your position.
• Place a stop-loss order 0.10 below the lowest low. Raise your stop as prices rise.

Triple Tops

• Compute the formation height by subtracting the lowest low from highest high in the formation. Subtract the height from the lowest low. The result is the expected minimum price move.
• Since prices after most three-top formations continue moving up, always wait for prices to close below the lowest low reached in the formation (the confirmation point). Once confirmed, prices usually continue moving lower.
• Draw a trend line connecting the two valleys. If the line slopes upward, the pattern confirms when price closes below the line. Trade after pattern confirmation.
• The vast majority of triple top formations have pullbacks, so if you miss the breakout, place or add to your short position once prices begin heading back down after the pullback.
• For short positions, place a stop-loss order $0.10 above the nearest high.

Wedges, Falling

• For upward breakouts, the highest high in the wedge is the price target. For downward breakouts, use the formation height subtracted from the breakout price as the target.
• Since price can break out in any direction, wait for a close outside the trend line before taking a position.
• If you miss the breakout, trade the throwback or pullback. Trade when price resumes moving in the breakout direction.
• A substantial number of wedges break out downward but turn up and make a large rise.

Wedges, Rising

• Prices should fall to the bottom of the formation, at a minimum. For upward breakouts, subtract the lowest low from the highest high and add it to the breakout price. The result is the target price.
• Wait for the breakout (prices should close outside the trend line) to improve the chances of a successful trade.
• If you miss the breakout and still want to trade the stock, sell short after a pullback, once prices turn down or after a throwback, once the rise resumes.

Dead-Cat Bounce

•  Wait for the bounce to peak and then sell.
• For swing traders, buy when price finishes the event decline. Sell when price peaks in the bounce phase. Never buy a stock showing a DCB just because it is cheap! It will be cheaper in the coming weeks.
• Short at the bounce high, ride prices lower, and cover when the trend changes.

Dead-Cat Bounce, Inverted

Earnings Surprise, Bad

• For intermediate- or long-term holders, do nothing, as the decline is likely to be small. For swing traders, consider selling immediately to minimize the loss. If price gaps down and the gap is small, price may retrace the next few days and cover the gap.
• In a bear market, wait for a close below the pattern’s low and then short the stock. It may bottom in a week, so watch it closely. Use stops to protect your profits.
• Used to predict a price target. On the announcement day, subtract the intraday low from the high, and subtract the difference from the intraday low. The result is the target price. Price hits the target 69% of the time in a bull market and 68% in a bear market.
• Traders can react to an announcement by pushing price in any direction. Thus, wait for the confirmation—a close below the intraday low before trading the event pattern.

Earnings Surprise, Good

• Never trade ahead of an earnings announcement.
• Buy when price closes above the announcement day’s high.
• Buy if price is in an uptrend and other stocks in the industry are doing well.
• Using prices from the announcement day, compute the difference between the intraday high and low. Add the difference to the intraday high to get the target price.
• For swing traders, put a limit order to sell at the target price. Price will hit it 75% of the time.

FDA Drug Approvals

Flag, Earnings

• Used to predict a target price. Take the difference of the formation high from the announcement day low. Add this difference to the flag low (the lowest low to the right of the flagpole). The result is the target price. Price reaches the target 86% and 84% of the time in bull and bear markets, respectively.
• Buy when price closes above the formation high or pierces a flag trend line, but never before.
• Price may top out in the first week. In bear markets, look for weakness a month into the trade.
• A throwback occurs over half the time, so expect it. If it occurs and price begins rebounding, add to your position.

Same-Store Sales, Bad

• Used to predict a target price. Using the day of the announcement, compute the height by subtracting the intraday low from the intraday high. Subtract the difference from the intraday low for the target price. Price reaches the target 68% of the time.
• Sell a long holding or sell short when price closes below the formation low, especially if the stock has been underperforming (prior 3S patterns, in a price downtrend).
• Buy once price bottoms and the stock begins recovering.

Same-Store Sales, Good

• Used to predict a target price. Using the day of the announcement, compute the height by subtracting the daily low from the daily high. Add the result to the daily high for the target price. Price reaches the target 82% and 72% of the time in bull and bear markets, respectively.
• Buy when price closes above the formation high and use a stoploss order to protect profits.
• Expect to take profits in a week or two. Sell when price starts heading down.
• After the upward breakout, price should reach the ultimate high quickly. Once they start heading back down, sell short. Watch for a throwback to stall price near support zones (including the announcement day gap). Protect your position with stops.

Stock Downgrades

•  Used to predict a target price. Using the day of the downgrade, compute the height by subtracting the intraday low from the intraday high. For upward breakouts, add the result to the daily high; for downward breakouts subtract it from the daily low. The result is the target price. This method works between 64% and 71% of the time.
• None. Do not buy after a broker downgrades the stock. Most likely, price is going to drop.
• For downward breakouts, sell a long holding immediately or sell after price turns down after a pullback.
• Price peaks in 1 to 3 weeks after the downgrade, so consider selling as price rounds over after an upward breakout.
• Selling short is risky and downgrades are not reliable short candidates. Too often, price drops for a week or two and then recovers. If you still want to short, sell immediately and use stops to limit losses. The best performance comes from downgrades within a third of the yearly low, so check for that.
• If the breakout is upward, watch the stock as it climbs. It may top out quickly. When it starts heading down, short it. Use stops to protect your wallet (or purse). See Sample Trade—Upward Breakout—for an example.

Stock Upgrades

• Used to predict a target price. Using the day of the upgrade, compute the height by subtracting the intraday low from the intraday high. For upward breakouts, add the result to the intraday high; for downward breakouts subtract it from the intraday low. The result is the target price. Price meets the target between 67% and 81% of the time.
• After a downward breakout, prices drop and then start recovering. Buy when you are sure prices are rising. Use stops in case you are wrong and to lock in profits.
• After an upward breakout, prices rise, curl over, and then head down. Sell short near the peak and use stops to protect your gains.
• If you own the stock, watch the breakout direction. If it breaks out downward, sell immediately or buy more after the stock bottoms. If the breakout is upward, hold onto your stock until it peaks and then consider selling.
• Wait for price to close above the daily high or below the daily low before trading.