The seven reversal candlestick pattern combinations that will be explained below are ways to assist you in making 'top catching and bottom fishing' judgments.
One, double peak reversal
A double peak reversal refers to the formation of two wave peaks at price tops or bottoms, also known as double tops and double bottoms, commonly referred to as 'M' and 'W' shaped reversals.
The double peak reversal pattern does not necessarily mean a price reversal; it may also rise supported by a support line during the price pullback to the neckline. At this time, the price moves within the area between the support line and the previous two high points, forming various patterns such as triple tops and triangles, but this possibility is very small.
The farther apart the two peaks are, meaning the longer the duration of the two tops and bottoms, the greater the potential for a double top reversal in the future, and the fluctuations after the reversal will be more intense.
The price increase (decrease) after the breakout of the double peak pattern is 1–3 times the height of the neckline itself.
Two, head and shoulders top
This is a long-term trend reversal pattern, which usually appears at the end of a bull market.
The head and shoulders reversal pattern consists of three peaks, with the middle peak higher than the other two, thus called the head. The two peaks on the left and right are lower and referred to as the shoulders.
When the neckline of the head and shoulders top is broken, it is a true sell signal. Although the price has retraced significantly compared to the highest point, the downtrend has just begun, and investors who have not sold continue to sell. After the neckline is broken, we can predict the price level based on the minimum decline measurement method for this pattern.
— Draw a vertical line from the highest point of the head to the neckline, then measure the same length downwards starting from the point where the right shoulder breaks through the neckline. The price measured this way is the minimum decline that the stock will experience.
Example:
[Blue circles are reference sell signals]
Three, head and shoulders bottom
(1) The shapes of the head and shoulders top and head and shoulders bottom are quite similar.
(2) When the neckline of the head and shoulders bottom breaks, it is a true buy signal. Although the price has risen to a certain extent compared to the lowest point, the upward trend has just begun, indicating that buying investors should continue to enter. The minimum upward movement measurement method is to draw a vertical line from the lowest point of the head to the neckline, then from the point where the right shoulder breaks through the neckline, measure upward the same height, and the price measured this way will be the minimum upward movement of the stock.
Additionally, when the neckline resistance is broken, there must be a surge in trading volume; otherwise, this may be a false breakout. However, if trading volume gradually increases after the breakout, the pattern can still be confirmed.
(3) Generally speaking, the head and shoulders bottom pattern is flatter, thus requiring a longer time to complete.
(4) After breaking the neckline, there may be a temporary pullback, but it should not fall below the line. If it pulls back below the neckline, or if the price falls back at the neckline level without breaking the neckline resistance and falls below the head, this may be a failed head and shoulders bottom pattern.
(5) The head and shoulders bottom is one of the most predictive patterns. Once confirmed, the upward movement will generally exceed its minimum upward movement.
The head and shoulders reversal pattern has many special forms, such as composite head and shoulders patterns, and the analysis method is the same as that for head and shoulders reversal patterns. Below are several common patterns to deepen everyone's impression.
Four, triple top (bottom)
Any head and shoulders pattern, especially when the head does not exceed the shoulders by much, can be referred to as a triple top (bottom) pattern. The triple top pattern is also very similar to the double top, just with one more peak, and each peak is spaced apart and deep. The triple bottom is the inverted triple top, with the same analytical meaning.
Five, rounded bottom (top)
The price rises in a solitary shape. Although it continues to rise, each high point retraces a little, first with new high points higher than previous points, and then the rebound points slightly lower than previous points. Connecting the short-term high points forms a rounded top. In terms of trading volume, there will also be a circular shape.
(1) Sometimes after the rounded head forms, the price does not immediately fall but instead fluctuates horizontally, forming a hovering area referred to as a bowl handle. Generally speaking, this bowl handle will quickly break through, and the price will continue to develop towards the anticipated downward trend.
(2) Rounded reversals can occur at both price tops and bottoms, with similar patterns but opposite meanings.
At the bottom, the price shows a solitary downward trend; initially, the pressure from sellers gradually lessens, leading to a continuous decrease in trading volume, but the buying power remains hesitant. At this point, although the price is falling, the magnitude is slow and small, and its trend curve gradually approaches the horizontal.
At the bottom, the buying and selling forces reach a balanced state, resulting in only a very small trading volume. Then demand begins to increase, and the price rises, finally allowing buyers to completely control the market, leading to a significant price increase and a breakthrough upward scenario.
In terms of trading volume, it initially decreases slowly to a certain level and then increases, forming a rounded bottom shape. This pattern indicates that a significant bull market is about to arrive. Investors can enter when the upward momentum of the rounded bottom begins to accelerate.
Six, V-shaped reversal and extended V-shaped reversal
Downward phase: The left side of the V shape usually has a very steep decline, lasting for a short period.
Turning point: The bottom of the V shape is very sharp, and generally, the time taken to form this turning point is only three or two trading days, with trading volume significantly increasing at this low point. Sometimes the turning point appears on panic trading days.
Recovery phase: Then the price rebounds from the low point, and the trading volume also increases accordingly.
The price must have an increase in trading volume when breaking through the top of the hovering area of the extended V shape. When it breaks below the bottom of the inverted extended V shape, an increase in trading volume is not necessary.
Pattern significance:
Due to the strong selling power in the market, prices stabilize and continue to decline. After this selling force disappears, the buying power completely controls the entire market, causing the price to dramatically rebound, almost recovering all losses at the same speed as the decline; thus, the price movement on the chart forms a V-shaped trajectory.
The inverted V shape is exactly the opposite; market optimism causes prices to rise steadily, but a sudden factor reverses the entire trend, causing sellers to drop at the same speed as the rise, forming an inverted V-shaped trajectory. This pattern is usually caused by unforeseen factors and information-sensitive investors.
Seven, expanded reversal type (trumpet shape)
After a period of price rise, it falls, then rises again and falls again, with each peak being higher than the previous one and each trough being lower than the previous one. The entire pattern begins with narrow fluctuations and then expands upwards and downwards. If we connect the high and low points, we can draw a mirrored triangular shape, which is called a trumpet shape.
In terms of trading volume, the trumpet shape maintains high and irregular trading throughout the formation process. The trumpet shape can be ascending or descending, with the same meaning.
A standard trumpet shape should have three high points and two low points. Each of these three high points is higher than the last, while the two low points are lower than the previous one; when the price falls back from the third high point, if the falling low point is lower than the previous low point, the formation of the pattern can be assumed. Like the head and shoulders top, the trumpet shape belongs to the 'five-point reversal' type, so a flatter trumpet shape can also be seen as a head and shoulders type trend with a higher right shoulder and a downward sloping neckline.
The trumpet shape is caused by investors' impulsive and irrational emotions, so it rarely appears at the bottom of a bear market. The reason is that after a period of decline, the willingness to invest weakens, making it impossible to form this pattern in a depressed market atmosphere.
