Technical analysis II

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9. Reversal patterns

Price trends, whether upwards or downwards, have to end at some point. The problem comes in predicting how and when.

Technical analysts have identified a number of so-called "reversal patterns" which indicate the end of a trend. The most common of these are:

• Head and shoulders top and bottom
• Double top and bottom
• Rounding top and bottom
• Broadening formation
• Rising and falling wedge

Each of these has a distinctive shape on a chart.

One important factor in identifying reversal patterns is volume - the number of shares traded in the stock. Often a chart will look like it is developing one of the accepted reversal patterns, but then the reversal will fail to materialise and the price will continue on its upward or downward trend (i.e. not 'reverse'). Volume can help you distinguish between a real reversal pattern and a dummy one.

On the following pages, you'll find descriptions not only of the reversal patterns themselves, but also of volume that you should expect to accompany these patterns.

1. Average share prices 2. Moving averages 3. Weighted moving averages 4. Where to plot moving averages 5. Interpreting moving averages - the basics 6. Classic interpretation of moving averages 7. Combining short and long term moving averages 8. Moving average convergence/divergence (MACD) 9. Reversal patterns 10. Head and shoulders top 11. Head and shoulders bottom 12. Double top 13. Double bottom 14. Rounding tops and bottoms 15. Broadening formations 16. Wedge formations 17. The momentum indicator 18. The momentum oscillator 19. Rate of change indicator 20. Price minus average 21. Relative strength indicator 22. Conclusion

• Martin Pring's Introduction to Technical Analysis
• Technical Analysis Plain and Simple
• Technical Analysis of the Financial Markets
• An Introduction to Technical Analysis - Reuters Financial Training Series