Technical Analysis Price Patterns Part 2

Reversal Patterns

Double Tops and Bottoms

Double Top

A double top reversal pattern is formed with a large demand during the formation of the first top and a lack of demand with the second top.

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With daily price bars (figure 4.46), tops are separated by about four to eight weeks and should only have a small difference in price level. The in between reaction should have a price drop of about 10% measured from the first top.  

With an accuracy of 80%, this pattern is very reliable.

The pattern is confirmed when the price falls below the level of the middle reaction.  

Figure 4.46: Double top pattern.

Double Bottom

For a double bottom, the reasoning is analogous to that of a double top. The trend is down, and a double bottom pattern is formed as an indication that the trend probably will reverse.

With daily price bars, bottoms are separated by about four to eight weeks (figure 4.47) and should only have a small difference in price level. The in between reaction should have a price rise of about 10% measured from the first bottom.  

With 80% reversals, this pattern is very reliable.  
The pattern is confirmed when the price rises above the level of the middle reaction.

Figure 4.47: Double bottom pattern

Rounding Bottoms

A rounding bottom pattern (rounded bowl shape) appears on daily and weekly bar charts.
This pattern takes time to complete.
The price can peak halfway through the pattern, but usually it retraces most of it quickly.
Rounding bottoms are becoming rare because of the high volatility of the markets as a result of the information society.
Rounding bottoms lead to a price reversal 90% of the time.

Figure 4.48: Rounding bottom pattern.

Like in figure 4.48, a rounding bottom starts with a steep falling trendline that with time, becomes increasingly flat.

The opposite is true in most of the other patterns; that is, you start with a flat trendline and finish with a steeper trendline.
The pattern confirms when the price closes above the highest peak of the pattern. There may be a saucer lip when the price drops temporarily before continuing the uptrend.

>V-formations

In a V-formation, you are looking for a V-shaped reversal pattern from a range of bars. A bottom reversal creates a V-character; a top reversal creates an inverted V-character.
The price at the start of the V-formation will form either a one-day reversal, an island reversal, or a spark.  

Figure 4.49: V-formation; one day top reversal.

A one day top reversal (figure 4.49) arises if the price makes a new high on the same day and reverses and closes below the closing price of the previous day. A one-day top reversal in a candle chart is a black candle and often is part of a candlestick pattern.

Figure 4.50: V-formation; one day bottom reversal.

A one-day bottom reversal (figure 4.50) arises if the price makes a new low on the same day and reverses and closes above the closing price of the previous day.

An island reversal occurs when there is a window between the prices of today, the previous day, and the following day(s).

A spark is a big, one-day high volatility price move. A V-formation start can be recognized most of the time when it breaks the last possible steep trendline, together with a candle stick reversal pattern just before, and a one-day island or spark reversal.

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