Zoom on Chartism, Support and Resistance

Zoom - Chartism, Support and Resistance

By Crypto Nation – 09 December 2020   

The chartist patterns allow to obtain technical indicators, linking high points and/or low on a price chart.

These highs and lows are used to define and draw resistance and support lines. The crossing of these levels gives signals to buy or sell. All the chartist patterns are linked to the probabilities, they make it possible to predict the evolution of the price.

In addition to being able to give signals to buy or sell, these patterns can indicate exit targets.

We will divide this zoom into two categories of chartist patterns: continuation patterns and reversal patterns. Continuation patterns indicate a continuation of the current trend. They are the sign of a consolidation and a probable resumption of the current upward or downward trend. Conversely, reversal patterns indicate an upcoming trend reversal. They show that the current trend is weakening.

Continuation chartist patterns

Continuation chart patterns announce a continuation of the trend. The figure exit is done in the direction of the movement preceding the figure formation.

In a downtrend, a continuation pattern indicates a continuation of the bearish movement. Conversely, in an uptrend, the figure announces a continuation of the bullish movement.

Continuation chart patterns allow the asset to consolidate the current trend movement without calling it into question. These patterns offer entry points to take advantage of the trend. But beware, whatever the extent of the consolidation within the pattern , we must wait for a signal to resume the trend before taking a position. This signal can be a reversal following a point of contact with one of the lines of the figure or an exit from the continuation figure, in the direction of the trend.

List of some continuation chartist patterns:

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Bullish Channel and Bearish Channel

The channel is a continuation of trend chart pattern. This figure is formed by two parallel bullish lines. The price evolves between these two lines. The upper line is called the resistance line and the lower line is called the support line.
Each of these lines must have been touched at least twice to validate the figure.

The bullish channel (with its reverse: the bearish channel) is the most frequent and widely used chart pattern in technical analysis. It is found on all time units.
There is no theoretical course objective on this chartist figure. The movement is bullish and may continue as long as the bullish channel support line is not broken (channel exit).

canal haussier
canal baissier

Pennant

This continuation chartist figure looks a lot like the symmetrical triangle but its characteristics are different.
This chartist figure generally appears following a sudden upward or downward movement.
The lifespan of a flag is short depending on the timeframe.

The direction of exit of a pennant figure depends on the movement which preceded it. The formation of the flag can therefore occur in an upward or downward trend.

The target price of a flag is calculated in relation to the trend that preceded its formation. Usually traders report the full height of the move leading up to the formation of the flag to the last low/high point in the pattern.

fanion
  • 75% of cases, the flag is released in the same direction as the movement preceding its formation.
  • 90% of cases, the pennant is a continuation figure.
  • 55% of cases, the price target for the flag figure is achieved.
  • 16% of cases, the course pulls back on the flag after leaving.

Cup and handle

The chartist figure in cup and handle is a continuation figure formed by two rounded hollows , the first being deeper and wider than the second.
The tops of the cup and the handle are aligned on the same horizontal resistance line. This line is called the neck line of the cup and handle figure.

For the figure to be valid, several rules must be respected:

  • The cup figure with handle must be preceded by a significant upward movement.
  • The low of the cup trough must be less than 50% of the uptrend that preceded pattern formation.
  • The lowest point of the handle should be less than 50% of the height of the cup.

The shape of the two troughs may make one think of a rounding bottom, which reflects the progressive exhaustion of sellers. Buyers gradually regain control once the neckline is crossed (psychological threshold), the buying force then becomes very strong.

The objective of the figure in cup and handle is calculated by deferring the height of the cup to the point of breakage of the handle.

tasse avec anse
  • 79% of cases, the output of a cup figure and handle is bullish.
  • 73% of cases, the objective of the cup figure and handle is reached (half the height of the cup), after breaking the neck line.
  • 74% of cases, after exit, the price carries out a pullback in support on the neck line.

Ascending Triangle and Descending Triangle

These chartist patterns are formed by two converging lines.
The first straight line is a bullish slant providing support, also known as the “triangle support line”.
The second line is a horizontal resistance, also known as the “triangle resistance line”.

The triangle is valid if there is an oscillation between the two lines.
Each of these lines must have been touched at least twice to validate the figure.

The price objective of an ascending or descending triangle is determined by the height of the base of the triangle which is carried over to the breakout point. Another technique is to draw a line parallel to the triangle’s support/resistance line from the first contact with the resistance/support.

triangle ascendant

Statistics of the ascending triangle:

  • 62% of cases, the exit is bullish.
  • 75% of cases, the ascending triangle is a continuation figure.
  • 75% of cases, the triangle’s price target is reached when resistance is broken on the upside (exit from ascending triangle).
  • 60% of the cases, the price carries out after exit a pullback in support on the line of resistance of the triangle.
  • 25% of cases, the price shows false line breaks, or false triangle exits.
triangle descendant

Statistics of the descending triangle:

  • 54% of cases, the exit is bearish.
  • 61% of cases, the descending triangle is a continuation figure.
  • 54% of cases, the triangle’s price objective is reached when the support is broken downward (exit from the descending triangle).
  • 64% of the cases, the price carries out after exit a pullback in resistance on the line of support of the triangle.
  • More than half the time, when a false breakout occurs from the bottom, the exit is ultimately made from the top. On the other hand, false breakouts from above are rare with only 6%.

Symmetrical vertex triangle and Symmetrical trough triangle

These patterns are formed by two converging trend lines symmetrical with respect to the horizontal.

For the symmetrical triangle to be said to be “top”, the movement preceding the formation of the triangle must be bullish. For the symmetrical triangle to be said to be “hollow”, the movement preceding the formation of the triangle must be bearish.

The symmetrical triangle is valid if there is an oscillation between the two lines.
Each of these lines must have been touched at least twice to validate the figure.

The price target of a symmetrical triangle is determined by the height of the base of the triangle reported to the breakout point (exit of the triangle). Another technique is to draw a line parallel to the triangle’s support/resistance line from the first contact with the resistance/support.

triangle symétrique de sommet

Statistics of the symmetric vertex triangle:

  • 63% of cases, the exit of the top symmetrical triangle is bullish.
  • 89% of cases, the bullish movement continues after exiting the triangle.
  • 81% of cases, the price manages to reach the price objective of the triangle in the event of an exit from the top.
  • 60% of the cases, the price carries out a pullback in support on the line of resistance of the triangle.
  • 16% of the time, the price makes false breakouts of the support/resistance lines (false exits of the symmetrical top triangle).
triangle symétrique de creux

Statistics of the symmetrical triangle of trough :

  • 57% of cases, the exit of the symmetrical trough triangle is bearish.
  • 91% of cases, the bearish movement continues after exiting the triangle.
  • 57% of cases, the price manages to reach the price objective of the triangle in the event of a bottom exit.
  • 60% of the time, the price pulls back in resistance on the support line of the triangle.
  • 16% of cases, the price makes false breakouts of the support/resistance lines (false exits of the symmetrical triangle of troughs).

Ascending Flag and Descending Flag

The flag is a continuation figure. It is formed by two parallel lines which form a rectangle. It is therefore oriented in the opposite direction of the trend that it consolidates. Unlike a channel, this figure is very “short term” and marks the need for sellers/buyers to take a break.

The formation of the ascending flag occurs in a downtrend. Most often, this pause occurs halfway through the movement. Conversely, the formation of the descending flag occurs in an uptrend.

The calculation of the objective is done in relation to the initial trend. The height of the entire movement preceding the formation of the flag is calculated and then this height is transferred to the last high/low point in the figure.

drapeau ascendant

Statistics on the ascending flag:

  • 87% of cases, there is a bearish exit.
  • 90% of cases, this is a continuation figure.
  • 62% of cases, the figure’s objective is achieved.
  • 10% of cases, a pullback occurs on the support.
  • 76% of ascending flags occur in the bottom 1/3 of the annual range.
drapeau descendant

Statistics on the falling flag:

  • 87% of cases, there is a bullish exit.
  • 90% of cases, this is a continuation figure.
  • 62% of cases, the figure’s objective is achieved.
  • 10% of cases, a pullback occurs on the resistance.
  • 76% of descending flags occur in the upper 1/3 of the annual range.

Reversal chartist patterns

The reversal chart patterns announce a reversal of the current trend. The exit of the figure is theoretically done in the opposite direction to the movement which preceded the formation of the chartist figure. In an uptrend, a reversal pattern announces a bearish movement. Conversely, in a downtrend, it announces a bullish movement.

We must not anticipate the exit of the figure. A reversal chart pattern is validated only when the price comes out of the pattern (break of the neck line or the bullish/bearish slant). For example, a chart can show a double bottom but this reversal chart pattern can turn into a triple bottom or a range, hence the need to wait for the buy/sell signal.

List of some chartist reversal patterns:

Rising wedge and Failing wedge

The bevel is a chartist figure formed by two converging straight lines.

The bevel is valid if there is an oscillation between the two lines. Each of these lines must have been touched at least twice to validate the figure.

A bevel marks the shortness of the buying or selling current. The convergence of the two lines in the same direction (decrease in the amplitude of the prices) informs us that the prices continue to evolve with movements of amplitude less and less strong.

The breakout of the support/resistance line definitively validates the pattern. This break is generally accompanied by high volumes. The price target is determined by the lowest/highest point that caused the bevel to form.

biseau ascendant

Ascending wedge statistics:

  • 82% of cases, the exit is bearish.
  • 55% of cases, the ascending bevel is a reversal figure.
  • 63% of cases, the figure’s goal is achieved when the support line is broken.
  • 53% of the time, the price pullbacks in resistance on the support line of the ascending wedge.
  • 27% of cases, false breaks (false exits) appear.
biseau descendant

Descending wedge statistics:

  • 82% of cases, the exit is bullish.
  • 55% of cases, the descending bevel is a reversal figure.
  • 63% of cases, the target in the pattern is achieved when the resistance line is broken.
  • 53% of the cases, the price carries out a pullback in support on the line of resistance of the downward wedge.
  • 27% of cases, false breaks (false exits) appear.

Ascending broadening bevel and descending widening bevel

The widening bevel is formed by two divergent straight lines.

The widening bevel is confirmed if there is indeed oscillation between the two straight lines. Each of these lines must have been touched at least twice to validate the figure.

During the formation of a widening bevel, the volumes do not have a particular behavior but they increase strongly at the time of breaking.

biseau elargissement ascendant apres hausse
biseau elargissement ascendant apres baisse
biseau elargissement descendant apres hausse
biseau elargissement descendant apres baisse

V Bottom and V Top

The V-shaped figure shows a sharp movement of the price, then a full retracement of the movement in stride. The V bottom often intervenes in a downtrend and announces a trend reversal. However, it can also form in an uptrend. Conversely, the V top often intervenes in an uptrend and announces a trend reversal. However, it can also form in a downtrend.

The V appears regularly following an economic announcement that upsets investors. This is a sign of high volatility.

The theoretical objective of the figure is the distance between the neck line and the lower/upper V which is transferred to the neck line.

V bottom
V top

Double Bottom (W) and Double Top (M)

The Double Bottom is a bullish chart pattern in the shape of a “W”. The price successively makes two troughs (lower) at approximately the same level, indicating significant support.
This chart pattern shows investors’ desire not to let the price reach new lows, and their desire to reverse the current trend.

The Double Top is a bearish chart pattern in the shape of an “M”. The price makes two successive peaks at approximately the same level, indicating significant resistance.
This chart pattern shows investors’ desire not to let the price reach new highs, and their desire to reverse the current trend.

The goal of a double bottom figure is calculated by plotting the height of the figure above the neck line.

The objective of a double top figure is calculated by plotting the height of the figure below the neck line.

When validating these patterns, it is common for the course to pullback on the neck line before reaching the objective of the figure.

double bottom

Double Bottom Statistics:

  • 70% of cases, the movement is bullish after a double bottom.
  • 67% of cases, the goal of the double bottom figure is achieved when the neck line is broken.
  • 97% of cases, the bullish movement continues at the break of the neck line of the double bottom figure.
  • 59% of the cases, the price carries out after exit a pullback in support on the line of neck of the figure in double Bottom.
double top

Double Top Statistics:

  • 75% of cases, the movement is bearish after a double top.
  • 83% of cases, the course breaks the neck line of the double top figure.
  • 71% of cases, the goal of the double top figure is achieved when the neck line is broken.
  • 83% of cases, the bearish movement continues at the break of the neck line of the double top pattern.
  • 61% of cases, after exiting, the price performs a resistance pullback on the neck line of the double top figure.

Hollow Diamond and Summit Diamond

The diamond is a trend reversal chart pattern. It is formed by two symmetrical juxtaposed triangles, thus forming a lozenge.

A trough diamond should be preceded by a downtrend. This figure marks the shortening of the current seller and the indecision of investors. Conversely, a top diamond must be preceded by an uptrend. This figure marks the weakening of the buying trend and the indecision of investors.

Volatility and swings are increasing in the first half of the pattern, then decreasing in the second half of the pattern.

The price target of a diamond is calculated by reporting the maximum/minimum height of the diamond at the exit point.
In general, the exit movement is as fast as the down/up movement that preceded it.

diamant creux

Diamond Hollow Statistics:

  • 82% of cases, the exit of a trough diamond is bullish.
  • 79% of cases, the price target for a trough diamond is reached.
  • After exit, in 43% of cases, the price carries out a pullback in support on the resistance line of the symmetrical triangle (2nd half of the diamond).
diamant sommet

Summit Diamond Statistics:

  • 80% of cases, the output of a top diamond is bearish.
  • 95% of the time, the price target for a top diamond is reached.
  • After exit, in 59% of cases, the price carries out a pullback in resistance on the support line of the symmetrical triangle (2nd half of the diamond).

The “Head and Shoulders” patterns

Inverted head and shoulders and head and shoulders are trend reversal chart patterns.

In theory, the height of both shoulders should be the same, and the neck line should be horizontal.
In practice, it often happens that the shoulders are not the same height, or that the neck line is ascending or descending (depending on the shape of the shoulders of the figure).

The first and third trough/peak (approximately the same height) form the shoulders.
The second hollow/top (at a height lower/higher than that of the shoulders) forms the head.
There is no fixed rule but some authors consider that the height of the head should be 1.5 to 2 times that of the shoulders.

The neck line is determined by the two highest highs/lows reached after the first shoulder and the head. These two high/low points are not always at the same level. The neck line can therefore be ascending, descending or more rarely, horizontal.

The head and shoulders figure is definitively validated at the break in the neck line. The target price is equal to the height between the neck line and the top of the head, carried over/under the neck line.

ETEi

Statistics of the inverted head and shoulders figure:

  • 98% of cases, the output of the inverted head and shoulders pattern is bullish.
  • 74% of cases, the course achieves the goal of the inverted head and shoulders pattern when the neck line is broken.
  • 97% of cases, the bullish movement continues at the break of the neck line.
  • 52% of cases, and after exit, the course performs a pullback in support on the neck line of the reversed head and shoulders figure.
ETE

Head and shoulders figure statistics:

  • 93% of the cases, the exit of the head and shoulders pattern is bearish.
  • 63% of cases, the course achieves the goal of the head and shoulders figure when the neck line is broken.
  • 96% of cases, the bearish movement continues at the breakout of the neckline.
  • 45% of cases, and after exit, the course performs a resistance pullback on the neck line of the head and shoulders figure.

Source and details : centralcharts.com

Chartist patterns cheat sheet

Trade Charts

Explanatory video

Find below on explanatory video the rules of chart patterns, as well as the use of support and resistance lines, made by our partner Zone9. This content is in French.

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