If a picture is worth a thousand words (as the saying goes), then a stock chart is worth thousands of dollars (or more)!
Why?
Because very often the price action on a chart can form meaningful patterns. These chart patterns reflect the collective buying and selling sentiment of the market. And these patterns, in turn, can be used in trying to forecast future price direction and the timing surrounding it.
Research has proven that certain chart patterns have high forecasting probabilities.
These patterns include:
- Symmetrical Triangles
- Ascending & Descending Triangles
- Wedges
- Flags & Pennants
- Rectangles
- and the Head and Shoulders & Inverted Head and Shoulders patterns
What do they all have in common?
They were all patterns in some of the biggest market moves!
Clear Objective Analysis
Charts can also help cut through the clutter and provide sound objective analysis.
Earlier in 2009 when everyone was expecting the stock market to go to ‘zero’ (not really, but you know what I mean), the market was quietly forming one of the most bullish bottoming patterns out there – the Inverted Head and Shoulders pattern.
Below is an illustration on an Inverted Head and Shoulders pattern. And beneath it, is a chart of the S&P 500 as it was tracing this pattern out and getting ready for its historic rally.
Can you see it?
(Inverted Head and Shoulders illustration)
(Inverted head and shoulders pattern that signaled the stock market bottom in 2009)
This set up one of the biggest one-year stock market rallies.
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This picture was worth way more than a thousand words and significantly more than thousands of dollars.
If you didn’t see it, don’t despair.
But now that you see what the pattern looks like, you’ll likely never miss this opportunity again.
And these types of formations happen all the time in thousands of individual stocks everyday.
Techniques That Work in Both Up and Down Markets
Chart patterns can be classified into two main categories: continuation patterns and reversal patterns.
Continuation Patterns
Continuation patterns are called that because they generally will continue the direction of the trend. For example: if a stock is in an uptrend and then pauses or enters into a period of consolidation (i.e., trading is temporarily confined to a well-defined pattern or range), the expectation is that the market will ultimately breakout to the upside and continue the direction of the trend.
If the trend was down prior to the consolidation, the expectation would be for the stock to breakout to the downside and continue the direction of the downtrend.
Reversal Patterns
Reversal patterns have a tendency of reversing the trend. These consolidation patterns can signal a reversal in both uptrends and downtrends.
Once you learn how to spot these different patterns, you’ll feel like you’ve just learned a powerful money making secret to make smarter and more timely decisions.
Don’t Forget the Fundamentals
Fundamentals of course are still an important key in ultimately determining the price or value of a stock.
But the charts can help you determine when the market is ready to react to those fundamentals.
For example, how many times have you read about, heard about or researched a certain stock, determined that the fundamentals were bullish (or bearish) only to then take a position and watch the market go the other way?
Confused and frustrated, you dump your stock only to then watch it finally go the way you had been expecting from the beginning. And the reasons for your earlier market convictions are now being played out in the news while you stand by wondering what happened?
Ever happen to you? It doesn’t have to.
By combining both fundamental analysis and technical analysis together, you can more accurately signal the future price direction of a stock and the timing surrounding it.
The Right Time
Currently, there’s an abundance of chart patterns forming in the market right now.
Both bullish and bearish. Continuation patterns and reversal patterns. And this is means something big is about to happen.
Will you recognize the next pattern? If so, will you know how to trade it?
The good news is, if you’ve ever looked at a chart before, you’ve just practiced technical analysis.
Now take your understanding to the next level and know what to buy and sell and when to do it.
Keep in mind, nothing is foolproof. But a basic understanding of chart patterns will give you an edge in beating the market, and help you get in on the next big move.
To help you get started making money with charts, you may want to check out our Zacks Chart Patterns Trader service. Follow along as we apply all of the principles above and select the best chart pattern stocks. Both bullish and bearish. Discover what it feels like to be in on the right side of a breakout and gain a level of confidence in your trading that you may never have experienced before.
Earlier this week, we offered you special savings on this service. Given that some of you may have been distracted by the holidays, we’re extending your opportunity to save. But, it expires at 11:59 p.m. on Saturday, December 24
Find out more about the Chart Patterns Trader >>
Thanks and good trading.
Kevin
Kevin Matras
Vice President, Zacks Investment Research
Kevin Matras is our world-class research expert who has developed more than 30 market-beating strategies using the Zacks Rank. He also directs our service that combines the fundamental power of the Zacks Rank with the timing of technical analysis, Chart Patterns Trader.
