Chart Patterns

Pennant

Pennants are continuation patterns drawn with two trendlines that eventually converge. A key characteristic of pennants is that the trendlines move in two directions—one will be a down trendline and the other an up trendline. The figure below shows an example of a pennant. Often, the volume will decrease during the formation of the pennant, followed by an increase when the price eventually breaks out.

A bullish pennant is a pattern that indicates an upward trending price—the flagpole is on the left of the pennant.

Image by Sabrina Jiang © Investopedia 2020

A bearish pennant is a pattern that indicates a downward trend in prices. In a bearish pattern, volume is falling, and a flagpole forms on the right side of the pennant.

Flag

Flags are continuation patterns constructed using two parallel trendlines that can slope up, down, or sideways (horizontal). Generally, a flag with an upward slope (bullish) appears as a pause in a down trending market; a flag with a downward bias (bearish) shows a break during an up trending market. Typically, the flag's formation is accompanied by declining volume, which recovers as price breaks out of the flag formation.

Image by Sabrina Jiang © Investopedia 2020 

Wedge

Wedges are continuation patterns similar to pennants in that they are drawn using two converging trendlines; however, a wedge is characterized by the fact that both trendlines are moving in the same direction, either up or down.

A wedge angled down represents a pause during an uptrend; a wedge angled up shows a temporary interruption during a falling market. As with pennants and flags, volume typically tapers off during pattern formation, only to increase once price breaks above or below the wedge pattern.

Wedges differ from triangles and pennants in that they reflect only upward and downward price movements, so the wedge generally appears angled.

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Ascending Triangle

An ascending triangle is a continuation pattern marking a trend with a specific entry point, profit target, and stop loss level. The resistance line intersects the breakout line, pointing out the entry point. The ascending triangle is a bullish trading pattern.

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Descending Triangle

The descending triangle is the opposite of the ascending triangle, indicating that demand is decreasing, and a descending upper trend line suggests a breakdown is likely to occur. 

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Symmetrical Triangles

Symmetrical triangles occur when two trend lines converge toward each other and signal only that a breakout is likely to occur—there is no upward or downward trend. The magnitude of the breakouts or breakdowns is typically the same as the height of the left vertical side of the triangle, as shown in the figure below.

Image by Sabrina Jiang © Investopedia 2020

Cup and Handle

The cup and handle  is a bullish continuation pattern where an upward trend has paused but will continue when the pattern is confirmed. The "cup" portion of the pattern should be a "U" shape that resembles the rounding of a bowl rather than a "V" shape with equal highs on both sides of the cup.

The "handle" forms on the right side of the cup in the form of a short pullback that resembles a flag or pennant chart pattern. Once the handle is complete, the stock may breakout to new highs and resume its trend higher.

Image by Sabrina Jiang © Investopedia 2020

Head and Shoulders

Head and shoulders is a reversal pattern that can appear at market tops or bottoms as a series of three pushes: an initial peak or trough, followed by a second and larger one, and then a third push that mimics the first.

An uptrend interrupted by a head and shoulders top pattern may experience a trend reversal, resulting in a downtrend. Conversely, a downtrend that results in a head and shoulders bottom (or an inverse head and shoulders) will likely experience a trend reversal to the upside.

Horizontal or slightly sloped trendlines can be drawn connecting the peaks and troughs between the head and shoulders, as shown in the figure below. Volume may decline as the pattern develops and spring back once the price breaks above (in the case of a head and shoulders bottom) or below (in the case of a head and shoulders top) the trendline.

Image by Sabrina Jiang © Investopedia 2020 

Double Top and Bottom

The double top or bottom are reversal patterns, signaling areas where the market has made two unsuccessful attempts to break through a support or resistance level.

A double top often looks like the letter M and is an initial push up to a resistance level followed by a second failed attempt, resulting in a trend reversal.

A double bottom, on the other hand, looks like the letter W and occurs when the price tries to push through a support level, is denied, and makes a second unsuccessful attempt to breach the support level. This often results in a trend reversal, as shown in the figure below.

Image by Sabrina Jiang © Investopedia 2020 

Triple tops and bottoms are reversal patterns that aren’t as prevalent as head and shoulders, double tops, or double bottoms. But, they act similarly and can be a powerful trading signal for a trend reversal. The patterns are formed when a price tests the same support or resistance level three times and cannot break through.

The double bottom occurs when there are two troughs at the same height, indicating that sellers are in a weaker position than they were.

Gaps

Gaps are reversal patterns. They occur when there is space between two trading periods caused by a significant increase or decrease in price. For example, a stock might close at $5.00 and open at $7.00 after positive earnings or other news.

There are three main types of gaps: Breakaway gaps, runaway gaps, and exhaustion gaps. Breakaway gaps form at the start of a trend, runaway gaps form during the middle of a trend, and exhaustion gaps form near the end of the trend.