10 Buy signals

Question 1

High and Tight Flag

Answer 1

Best-performing chart pattern

Price should climb at least 90% in two months or less

After the rise, find a place where price pauses (often sideways to down) = congestion or consolation area

Volume should trend downward in the flag

Tight pennant = price touches trend line boundaries in small, compact crossings

• long flags generally fail

Question 2

High and Tight Flag - Trading and trading tips

Answer 2

Read identification
Trading and trading tips
When correctly identifying a high and tight flag
wait for the price to close above the pattern high (a close above the top of the flagpole or highest peak pattern) **

Buy the stock
Place a stop below the prior valley, below the pattern itself, or use a volatility stop (chapter 7)

High and tight flags have the lowest failure rate and highest average gain of any chart pattern

Place a stop loss order below the valley nearest the breakout and make sure the stop is not too close

What to look for or avoid
look for overhead resistance that occurred in the past, An HCR appears at a price level above where the stock is trading then which could act as the ceiling

Avoid looking for loose-looking flags - a tight flag has a price that overlaps from bar to bar

A receding volume trend in the flag portion of the high and tight flag sees better post-breakout performance when the price climbs an average of 50%

Question 3

Measuring Success for High and Tight Flags

Answer 3

find the lowest valley in the high and tight flag (the two months leading to the top of the flagpole) and measure the rise during the time to the top of the high and tight flag

Use half the pattern’s height added to the top of the pattern to get a target

Trend start - before the chart pattern, find the highest high or lowest low before which the price falls or rises by at least 20%

Question 4

Pipe Bottoms

Answer 4

use the weekly chart to select pipes (daily chart pipes don’t perform well)

Find two downward, adjacent price spikes looking like parallel lines
Spikes should be longer than spikes in the previous year

The bottom of the spikes usually has a small price variation

The two spikes should have a large price overlap

Volume is high (above the 30-day average) 71% of the time on one or both spikes
The pipe should be obvious in the chart

Question 5

Trading and trading tips for Pipe Bottoms

Answer 5

common pattern/ be selective
Found at the bottom of a price trend, most times as a v bottom

Swing traders = Buy when the price closes above the peak in a two-week pattern that will get you in sooner than on the weekly scale

Use a weekly scale for buy signals

Wait for the price to close above the higher of the two spikes before buying

Avoid overhead resistance on both daily and weekly scales

Tall patterns perform better than shorter ones

Select piped with a large price difference between spike lows

Volume heavier on the left spike compared to the right suggests better performance

Pipes with a lower left spike tend to perform better than those with a lower right spike

If the price closed below the lower of the pipe - get out

If the price advanced raise your stop to just below the prior valley (trailing stop)

Swing traders / sell if price stalls near a prior peak

read case study page 84 and figure 5.6 83)**

Question 6

Inverted Ascending Scallops

Answer 6

upside down or backwards J
On daily chart, find an upward price trend
Look for inverted and backwards J pattern - price should start by moving up in a nearly straight line (sometimes leading to the right) round and over smoothly at the top and then decline

Price at the end retraces an average of 54% of the prior move / avoid any pattern that retraces more than 100% (drop below the start)

Pattern becomes valid when price closes above the highest peak of the pattern
Volume trends downward 72% of the time from the start of the pattern to the end

A series of inverted and ascending scallops that get narrower or shorter may signal the end of an uptrend

Question 7

Inverted Ascending Scallops - Trading and Trading Tips

Answer 7

Swing traders: buy when the price makes a higher valley after completing the inverted and backward J with a price target of the scallop high

For other traders: buy when the price closes above the highest peak of the pattern

if the price drops below the scallop don’t trade it

Question 8

Three Rising Valleys

Answer 8

• Act as a reversal of the downward price trend
• Reversals give this the best performance
• Look for three valleys, each one higher than the last so the pattern begins or continues up
• The confirmed pattern is when it closes above the confirmation line - the highest peak in the pattern
• Look for this pattern on the weekly
• Look for three valleys; each valley must be higher than the last with no ties allowed
• Find similarly shaped valleys, pair wide ones with wide ones, narrow ones with slim valleys in both width and height
• A buy signal also occurs when it pieces a downsloping trendline drawn joining the peaks between the three valleys
• Volume trends downward in two out of three cases
• When the peak between the first two valleys is higher than the peak between the last two valleys, draw a downsloping trend connecting those peaks for an early buy signal

Question 9

Three Rising Valleys - Trading and Trading Tips

Answer 9

• This pattern is plentiful so be selective
• Switch to lower time scale to what the price landscape looks like
• Avoid overhead resistance
• Page 73
• Narrow patterns perform better than wide ones
• Patterns below average breakout volume perform better than the average volume
• Tall patterns perform better than short ones
• The further up the price trend of a three-rising valley pattern appears, the smaller the potential gain is
• Use the full height of the three rising valleys pattern applied to the highest peak to get a price target. For closer target, use half the height in the computation

Question 10

Rounding Bottom

Answer 10

• Rounding turns
• Many have prices that enter the rounding pattern from below = they act as consolidation (pauses) of the upward price trend

• Use weekly scale
• Rounding bottoms are large enough to see there
• Price enters the pattern trending upward 62% of the time (best or downward (38%)
• Look for a peak occurring before the rounding turn, this forms the left cup lip
• Price should round toward into a bowl shape, usually smooth but allow variations
• Midway through the turn, the price may shoot up and then ease down just above where it started
• Volume trends up 51% of the time
  Page 77 is an example of a failure rounding bottom
• Rounding bottoms in a rising price trend ten to outperform

Question 11

Rounding Bottoms - Trading tips

Answer 11

• Use the weekly to find a rounding turn midway part of its development
• Swing traders can sell if the price bumps up after the midway point - retrace a portion of the downward move that forms the left side of the cup above the launch point - after the price bottoms again, resume the uptrend and add to your position
• The standard buy location is where the price closes above the right lip- if it has one.
• If not, buy when the price closes above the price of the left lip
• A flat base of several months leads to a powerful rise after the breakout
• Patterns with breakouts near the yearly high perform best
• The median time from the right cup lop to breakout is 33 days
• Wider than 196-day median perform best
• Pattern taller than median 31.58% perform better than a short one

Question 12

Descending Triangles

Answer 12

• ## Great when the breakout is downward and the price moves up to close above the top of the pattern
• Look for two price trends: Valleys that align horizontally or nearly so, and peaks that slop downward, both should follow trendlines connecting them
• Price must touch each trendline at least twice but I strongly suggest three touches. Too many identification errors occur after using two touches
• Price must cross the pattern from side to side filling the pattern with price movement, no white space. Please do not cut off a rounding turn and call it a descending triangle
• We want to stay bullish with this pattern to trade upward breakouts. A breakout appears when the price closes above the downsloping trendline
• Volume slopes downward 79% and becomes quite low days before the breakout

Question 13

Descending Triangles Trading and Trading Tips

Answer 13

• Always wait for an upward breakout from a descending triangle
• Busted triangle, price breaks out downward and drops less than 10% before rebounding can lead to a gain
• Swing traders can buy near the horizontal trendline and sell when the price turns at the top trendline
• Extend the two trendlines into the future for support and resistance
• A buy signal when the price closes outside the top trendline (an upward breakout)
• Patterns with breakout day gaps do well, with the price rising an average of 46% after the breakout versus 33% for those without gaps

Question 14

Ascending Broadening Wedges

Answer 14

• Difficult to determine the entry price (when it breaks out of the pattern)
• Average rise of 37% if traded perfectly
• 4% of the patterns failed to rise at least 5% after the breakout

• Three peaks and three valleys should be near or touch upsloping trendlines
• Neither trendline should be horizontal
• The top trendline should slop upward more steeply than the bottom one
• The pattern should look like a megaphone tilted upward
• Volume trends upward 64% of the time
• Two trendlines following price action
• Both slop upward, but the top one is steeper than the bottom one so the trendlines diverge
• Breakout needs to pass beyond the top trendline (highest peak)

Question 15

Ascending Broadening Wedges - Trading and Trading Tips

Answer 15

• A partial decline happens when the price leaves the top trendline and heads down but swings upward before coming close to or touching the bottom trendline
• If partial decline works as expected, an immediate upward breakout follows
• Look for three touches for peaks and valleys to see for a partial decline before a breakout
• Partial rise: once the pattern is established, look for the price to rise off the bottom trendline but not come close to or touch the top trendline
• Partial rise is not easy, it looks like a pause that often occurs midway through a rise heading to the top trendline
• Read pages 90 and 91 for example

Question 16

Eve & Eve Double Bottoms

Answer 16

• The classic double-bottom
• Successful 45% with breakeven failure of 6%
• Right bottom at least 5% above the left is the best to trade

• Two valleys are wide, rounded appearing turns, spaced several weeks apart
• The rise between the bottoms is extensive
• Price should trend downward before the left valley but should not drop below the valley - don’t want to see a lower valley adjacent to the first valley
• The rise between the two valleys should be at least 10%
• The two bottoms should appear near the same price (less than 6% apart)
• 2 to 6 weeks should separate the two valleys
• Volume is usually higher on the left-bottom
• Price must close above confirmation line

Question 17

Eve & Eve Double Bottoms - Trading and Trading Tips

Answer 17

• Risky chart pattern
• The problem occurs after the price confirms the pattern
• Look for a shelf on the right bottom (flat top that can act as a support zone example figure 5.29)
• Be aware that a double bottom could be a triple
• Swing: buy when the price closes above (shelf) and sell at confirmation if the price stalls there
• Position traders/ investors: buy when the price closes above the confirmation price- highest peak between the two bottoms
• When price breaks a congestion region it can sometimes mean a strong trend up
• When a double bottom forms after a long flat price trend, the double bottom usually sports a large gain after a breakout
• If the pipe bottom forms as part of the right Eve bottom, buy stock when the pipe confirms
• Short and narrow eve & eve double bottom outperforms other combos of height and width (short 15.4% median height divided by price) (narrow means less than 43 days wide)
• Look for a big W pattern
• Patterns without throwbacks perform significantly better than those with throwbacks

Question 18

Triple Bottoms

Answer 18

• Price should trend downward to the first valley but not drop below it
• Three bottoms should appear near the same price but allow variations
• Several weeks usually separate each valley
• Volume trends downward 67% of the time from the first to the last bottom but may be high beneath the individual valleys
• Close above the highest peak before confirming it as a triple bottom
• If a double bottom forms a third bottom before the double bottom confirms, treat it as a triple bottom

Question 19

Triple Bottom: Trading Tips

Answer 19

• The rise between bottom 1 & 2 is higher than the rise between 2 & 3, draw a downsloping trendline connecting the tops = when price closers above this trendline, it’s a buy signal (Figure 5.33 pg 100)
• Flat base triple bottoms outperform = look for long months, horizontal or nearly so
• Use the weekly scale as the trend is clearer here
• It does well because it pushes through overhead resistance
• Triple bottoms = corrective phase of a measured move up, rise breakout might not be as high as expected
• Avoid trading patterns occurring after an extensive month uptrend - will end soon
• When a pattern appears after a decline, draw a downsloping line along with the peaks before the triple bottom - expect prices to stall once it climb to the trendline, play safe
• If a triple bottom appears after a decline from a peak, assume prices will stall when they return to the price of the peak, the pattern becomes the valley between two mountains
• If the third bottom has a flat area, SWING TRADERS should buy when the price closes above the threshold and sell at the confirmation price if the price stalls there, place a stop below the bottom
• For investors and portion traders buy when the price closes above the confirmation price - a higher peak btw the three bottoms or a downsloping trendline connecting the peaks btw the bottoms
• Throwbacks 60% of the time suffer in performance 40% rise post breakout without throwbacks versus 31% with throwbacks
• If the last valley bottom is above the price of the second one, expect better performance

Question 20

Head and Shoulder Bottoms

Answer 20

• Find three valleys with a centre valley below the other two
• The shoulders should appear similar in shape
• The shoulders should be almost equidistant from the head
• The shoulders should have valleys that stop near the same price
• Volume is highest on the head 43% the left shoulder 39% and the right shoulder 18%
• Volume trends downward 65% ( between left and right shoulder valleys)

Question 21

Head and Shoulders - Trading Tips

Answer 21

• For downsloping declines, a close above the trendline signals a buy
• For upsloping declines, use a close above the highest peak in the head and shoulders bottoms as a buy signal
• Head and shoulder bottoms appearing after a flat base tend to outperform - look for an extended horizontal price move of serval months duration before the head and shoulder bottom forms
• When the price declines in a straight line run leading to the head and shoulders bottom, expect the price to recover to the top of the pattern (variation of a big W) - Figure 5.29 example)
• Head and shoulders bottom with short-term declines (less than 3 months) leading to the pattern having post-breakout rises averaging 38%, intermediate-term to long decline yield increases of 35%
• Throwbacks happen 52% and when they occur, performance suffers.
• 41% rise post breakout without throwbacks versus 33% with throwbacks
• Avoid selecting patterns with overhead resistance that may cause a throwback
• When volume is higher on the right shoulder, the pattern outperforms - 40% average rise versus 34% for volume highest on the left shoulder and 38% for high volume surrounding the head
• Postbreakout performance improves for those head and shoulders bottoms with downsloping necklines 40% average rise versus a 32% rise for those with upsloping necklines
• Pattern taller than 14.7% median height divided by the breakout price rise an average of 46% post breakout versus 31% for short head and shoulders bottoms
• 88% acted as a reversal of the prior price trend
• From the right shoulder valley it takes an average of 12 days for the stock to climb to the breakout price