A gap in a chart is basically an empty space between one trading period and the one prior to that trading period. They normally form on account of an important and material event that will affect security, like an earnings surprise or a merger agreement.

This will happen when there is a large enough distinctness in the opening price of a trading period where the price and the subsequent price that moves do not fall within the range of the previous trading period. For instance, if a particular price of a company’s stock trades near $40 and then the next trading period opens at $45, there should be a large gap up on the chart between the two periods, as indicated below.

Figure 1

The Gap price activity can be found on bar charts and candlestick charts however will not be found on point-and-figure or basic line charts. The reasoning behind this is for that every point on both point-and-figure charts and line charts are connected.

Flags and Pennants are categorized as a continuous pattern. They normally represent only brief pauses in a dynamic stock. They’re typically seen immediately after a quick move. The stock will then take off again in the same direction. Research shows that these patterns are many of the most reliable continuation patterns. Take a look at typical Flag and Pennant pattern.

Bullish flags are identified with lower tops and lower bottoms, and with the pattern slanting against the trend. However unlike wedges, their trend lines run parallel.

Bearish flags are made up of higher tops and higher bottoms. Bear flags will also have a inclination to slope against the trend. Their trend lines run parallel as well.

Pennants look a lot like a symmetrical triangle. However pennants are normally smaller in size (volatility) and duration. Volume in most cases contracts during the pause with an increase on the breakout.

HERE IS A SAMPLE CHART WITH A FLAG & PENNANT PATTERN

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The V top is a reverse V-shaped top thus the name. The top is quite sharp. It’s due to the irrationality of actors leading to a steep increase that will be corrected shortly afterwards. The V top will occur most often in an upward trend and will often signal a trend reversal. It can also appear in a downward trend, like when in an economic announcement.

The neckline of the pattern is formulated by the lowest point before the formation of the reverse V.

Here is a graphical representation of a V top:

The general objective of the V Top pattern is the distance between the neckline and the lowest of the reverse V that extended to the neckline.

Various criteria is used to identify a V top:

– The highest point of the reverse V is often formulated by a single candle, often with a long upper shadow that underlines the reversal willingness of investors.

– The sharp upward movement that forms the reverse V is led by a steep upward slant. The price will make any pause during the bullish movement.

– The angle of the line that leads the bearish reversal should be similar to the angle of the line that led the bullish downtrend.

– It is quite difficult to anticipate a V top.

– The interest of the pattern is in its reversal potential.

– The V top will often appear in a channel.

The V bottom is shaped like a V thus the name. The dip will be quite sharp. It’s because the irrationality of actors leading to a steep fall which will be corrected shortly after. The V bottom will occur most often in a downward trend and will generally  offer a signal trend reversal. It can also appear in an upward trend (like in an economic announcement).

The neckline of the pattern is formed by the uppermost point prior to the formation of the V.

Check this graphical representations of a V bottom:

The theoretical objective of the pattern is the distance between the neckline and the lowest of the V that’s extended to the neckline.

Here are several criteria that are used to identify a V bottom:

– The lowest point of the V bottom is often formed by a single candle, often with a long lower shadow which underlines the reversal willingness of investors.

– The sharp downward movement that forms the V is guided by a very steep downward slant. The price will often make a pause during the bearish movement.

– The shape of the line that leads the bullish reversal will be nearly identical to the shape of the line that leads the bearish downtrend.

– It is quite difficult to anticipate a V bottom.

– The interest of the pattern is in its reversal potential.

– The V bottom often appears in a channel.

– The upward trend will continue in most cases once the pattern is completed, but in trend.

A horizontal channel is a pattern that underlines investor’s indecisiveness. This horizontal channel is assembled by two horizontal and parallel lines that build the progress of the price. To confirm a line, there should be at least two points of contact with the price. The more contact points it will has, the more these will be durable and their breakout will give an substantial buy/sell signal.

The horizontal channel is a familiar chart pattern. It’s found on every time frame. Central to this channel, buying and selling forces are alike and only the breakout of one of the two bands will show an advantage to one of them.

The abstract objective of the pattern will be calculated by extending the length of the channel on the break point.

Check the graphical representation of a horizontal channel:

The goal price of this pattern is ascertained by its height from the base of the triangle that’s carried over the break point. Try the technique to draw a parallel line to the support of the symmetrical triangle from the first contact point with the resistance which will help obtain a bullish target price.

The more the horizontal channel is long, the more the movement at the exit will remain strong.

Pullbacks are usual.  The breakout will often occur at the 4th contact point.

The descending triangle is a bearish continuation pattern. This pattern forms two converging lines. The initial is a downward slant which resistance and the other is a horizontal support. To validate the descending triangle, there must be oscillation between the two lines. The lines must be touched at least twice for validation.

A graphic representation of an descending triangle follows:

The price of this pattern is decided by its height from the base of the triangle that is carried over the break point. A technique used is to draw a parallel to the support line of the descending triangle from the first contact point with the support

This pattern is difficult to classify. Indeed, the exit is bearish just over half the time. So this is a continuation pattern but may also be a reversal pattern symbolizing a buying accumulation zone. Bullish movements are also more important than downward movements.

Look at these statistics about the descending triangle:

– In 54% of cases, there is a bearish breakout.

– In 54% of cases, the target price can be reached when the support is broken. But when the bearish slant is broken, the percentage goes up to 84%.

– In 64% of cases, a pullback occurs on the support.

Over half the time, when a breakout does occur from the bottom, the exit will be made by the top. However, false breakouts by the top are rare with only 6%.

The exit often occurs at the 2/3 portion of the pattern. This is the output level that offers the best performance.

The target price of the pattern is often reached before the end of the triangle.

False breaks will give no indication on the true side of the exit.

Try to avoid taking a position if the breakout occurs before the 2/3 of the pattern.

Pullbacks can be harmful for the performance of the pattern.

The symmetrical triangle top is a bullish continuation pattern. This pattern forms two trend lines which are symmetrical to the horizontal and convergent. The initial pattern is a bearish slant that gives resistance and the other is a bullish slant that will be the support. To prove a symmetrical triangle top, one must have oscillation between the two lines. Each of these lines must be touched at least twice for validation.

Asymmetrical triangle “top” is necessary for the movement that precedes the formation of the triangle being bullish.

A graphical representation of a symmetrical triangle top is below:

The objected price of this pattern will be determined by its height from the base of the triangle that is carried over the break point. A technique you may use is to draw a parallel line to the support of the symmetrical triangle from the first contact point with the resistance in order to obtain a bullish target price.

Some statistics about the symmetrical triangle top are:

– In 63% of cases, there is an upward exit.
– In 89% of cases, the bearish movement will continue after the breakout.
– In 81% of cases, the target price will be reached in case of a bullish breakout.
– In 60% of cases, a pullback occurs.
– In 70% of cases, bullish breakouts will occur when the price is moving into the highest third of its annual range.
– In 16% of cases, there will be false breakouts.

The exit normally happens towards 80% of the distance of the pattern.

Sharping and strong breakouts will give a better performance.

A performance is better when the triangle is formed at the beginning of a trend.

Try to avoid taking a position if the breakout occurs before 3/4s of the pattern.

Pullbacks can be harmful for the performance of the pattern.

A symmetrical triangle bottom is a bearish continuation pattern. This pattern forms two trend lines that are symmetrical to the horizontal and convergent. The initial one is a bearish slant that gives support and the other will be a bullish slant that will create a resistance. To prove a symmetrical triangle bottom there must have oscillation between the two lines. Each line has to touch at least twice for validation.

A symmetrical triangle “bottom” is necessary so the movement that preceded the formation of the triangle is being bearish.

A graphical representation of a symmetrical triangle bottom is below:

The price of this pattern will be determined by its height from the base of the triangle so that its carried over the break point. A similar technique is to draw a parallel line from the resistance of the symmetrical triangle to the first contact point with the support which will obtain a bearish target price.

Some statistics about the symmetrical triangle bottom are:

– In 57% of cases, there is an downward exit.
– In 91% of cases, the bullish movement will continue after the breakout.
– In 57% of cases, the target price will be reached in case of a bearish breakout.
– In 60% of cases, a pullback occurs.
– In 16% of cases, there will be false breakouts.

The exit normally occurs towards 80% of the distance of the pattern.

A sharping and strong breakout gives better performance.

The performance is greater when the triangle is formed at the beginning of a trend.

Be sure to avoid taking a position if the breakout occurs before 3/4s of  the pattern.

Pullbacks are harmful for the performance of the pattern.