What Are the Most Reliable Stock Chart Patterns Used in Technical Analysis?

The ability to read stock charts can help a lot in making sound investment decisions as it not only gives a snapshot of a stock past performance, but also helps predict the future direction. In this article, we summarize the most reliable chart patterns used by investment professionals.

The most reliable bullish chart patterns:

* Cup with Handle: The cup is in the shape of a 'U' and the handle has a slight downward drift. The right-hand side of the pattern should have a low trading volume. It can be as short as seven weeks and as long as one year. As the stock comes back up to test the old highs, Investors who bought at or near the old high will start selling the stock to break even. This selling pressure will make the stock price trade sideways with a tendency towards a downtrend for four days to four weeks, then it takes off and takes out the old highs.
* Double Bottom: This pattern describes the drop of a stock, a rebound, another drop to the same level as the original drop, and finally another rebound that goes higher than the previous highs.
* Pennant: It is formed when there is a large movement in a stock, followed by a consolidation period with converging trendlines, followed by a breakout movement in the same direction as the initial large movement.
* Inverse Head & Shoulders: This happens when the price falls to a trough and then rises again. The price falls below the former trough and then rises again. Finally, the price falls again, but not as far as the second trough. Once the final trough is made, the price heads upward toward the resistance found near the top of the previous troughs. The first and third trough are considered shoulders, and the second peak forms the head.

The most reliable bearish chart patterns:

* Head & Shoulders: This happens when the stock rises to a peak and subsequently declines, then the price rises above the former peak and again declines, and finally, rises again but not to the second peak and declines once more. The first and third peaks are shoulders, and the second peak forms the head.
* Double Top: This pattern describes the rise of a stock, a drop, another rise to the same level as the original rise, and finally another drop. The double top looks like the letter 'M'. The twice touched high is considered a resistance level.
* Rounded Top: A rounded top, which looks like an inverse 'U', may form at the end of an extended upward trend and indicates a reversal in the long-term price movement. The initial upwards trend becomes exhausted as the demand for the stock dries up. The reversal to the downward slope of the rounding top indicates that demand has tapered off and a surplus supply is present, basically there are more sellers than buyers.
* Pennant: It is formed when there is a large movement in a stock, followed by a consolidation period with converging trendlines, followed by a breakout movement in the same direction as the initial large movement.

In our Investment Newsletter, we follow these guidelines and more to give you the best investment tips and help you choose what stocks to buy and most importantly when to buy. Our stock picks usually belong to the best performing sectors but could also include some short recommendations.

Marc Azar is a major contributor at the TheMarketNewsletter.com, a subscription based stock market newsletter providing daily commentary on the financial markets and a list of recommended stocks or ETFs.

Article Source: http://EzineArticles.com/?expert=Marc_Azar