1. IBD MEETUP/NORTHRIDGE
LET’S MEETUP TO VISIT THE ART OF STOCK CHART PATTERN RECOGNITION
AND REVIEW OUR MARKETWATCH GAME
MAY 16, 2015

2. DISCLAIMER
During the course of this meeting we will review stocks that could be considered as additions to your watch list.
These are not trade recommendations. These are candidate trades.   Do your own research, keep position sizes modest, and stay diversified. 
Also past performance is no indication of future stock trends.
We will also discuss Trading Strategies we believe to be effective; however keep in mind that nothing works100% of the time so there is no guarantee these strategies will work for you.

3. CHARTING AND PRICE MOVEMENTS
Just about everyone who has ever analyzed a security takes a look at the price movements of the past month, quarter, year, etc.
For many analysts, the chart of a security is the starting point for all future analysis. Even staunch critics of technical analysis use charts to some extent. And for good reason: charts can provide a lot of information in a small amount of time.
Taking a look at the five-year chart of a company, you can quickly determine how well shareholders have done over the period. Based on the movements represented on the chart, one can tell if a company's share value has grown over the period or lagged.
The chart reader also can determine the volatility of the company's shares by looking at the movements on the chart. A company whose stock exhibits very jagged up-and-down movements is clearly more volatile than a company whose stock moves relatively smoothly across time.
But this is only the tip of the iceberg in terms of how charts are used by market participants. In this tutorial, we'll introduce you to some of the more advanced uses of charts.

4. THE ADVENT OF COMPUTERS
Before the advent of computers and data feeds, the use of charts to formulate trading strategies was outside the mainstream of trading techniques.
The reason, creating charts was difficult. Each chart had to be created by hand, with chartists adding another data point at the close of trading for each security they were following.
Also, chart users were often misrepresented as a bizarre group of individuals huddled in the recesses of the brokerage house as they added the latest data point to their closely coveted charts. 
But with the advancement of technology and the increased popularity of technical analysis, the use of charts has greatly increased, making them one of, if not the most important tools used by technical traders.

5. CHART INFORMATION
A single chart has the ability to display a significant amount of information.
Conceptually, charts are an illustration of the struggle between buyers and sellers. Technical analysis assumes that:
a) prices discount everything,
b) prices moves in trends
c) history repeats itself. 
Assuming the above tenets are true, charts can be used to formulate trading signals and can even be the only tool a trader utilizes. 

6. PATTERNS ON A CHART 
Chart patterns signal to traders that the price of a security is likely to move in one direction or another when the pattern is complete. 
There are two types of patterns in this area of technical analysis: reversal and continuation.
A reversal pattern signals that a prior trend will reverse on completion of the pattern.
Conversely, a continuation pattern indicates that the prior trend will continue onward upon the pattern's completion. 
The difficulty in identifying chart patterns and their subsequent signals is that chart use is not an exact science. In fact, it's often viewed as more of an art than a science.
While there is a general idea and components to every chart pattern, the price movement does not necessarily correspond to the pattern suggested by the chart.
This should not discourage potential users of charts - once the basics of charting are understood, the quality of chart patterns can be enhanced by looking at volume and secondary indicators. 

7. CHART PATTERNS
Chart patterns put all buying and selling into perspective by consolidating the forces of supply and demand into a concise picture. As a complete pictorial record of all trading, chart patterns provide a framework to analyze the battle raging between bulls and bears. More importantly, chart patterns and technical analysis can help determine who is winning the battle, allowing traders and investors to position themselves accordingly.
In many ways, chart patterns are simply more complex versions of trend lines.
Chart pattern analysis can be used to make short-term or long-term forecasts. The data can be intraday, daily, weekly or monthly and the patterns can be as short as one day or as long as many years. Gaps and outside reversals may form in one trading session, while broadening tops and dormant bottoms may require many months to form.

8. PATTERN ANALYSIS
Pattern analysis may seem straightforward, but it is by no means an easy task. Richard Schabacker, in his 1932 classic, Technical Analysis and Stock Market Profits, states:
”The science of chart reading, however, is not as easy as the mere memorizing of certain patterns and pictures and recalling what they generally forecast. Any general stock chart is a combination of countless different patterns and its accurate analysis depends upon constant study, long experience and knowledge of all the fine points, both technical and fundamental, and, above all, the ability to weigh opposing indications against each other, to appraise the entire picture in the light of its most minute and composite details as well as in the recognition of any certain and memorized formula.”

9. TWO DOMINANT GROUPS
Two basic tenets of technical analysis are that prices trend and that history repeats itself. 
An uptrend indicates that the forces of demand (bulls) are in control.
A downtrend that the forces of supply (bears) are in control. 
However, prices do not trend forever and as the balance of power shifts, a chart pattern begins to emerge.
Certain patterns, such as a parallel channel, denote a strong trend.
However, the vast majority of chart patterns fall into two main groups:
Reversal
Continuation.
Reversal patterns indicate a change of trend and can be broken down into top and bottom formations.
Continuation patterns indicate a pause in trend and indicate that the previous direction will resume after a period of time.

10. FINDING PATTERNS
Many websites, i.e.  Finviz.com, also offer some basic pattern recognition features.
On Finviz, you can click on “Screener” then the “Signal” drop box to find plenty of patterns to search through.
Once you build your watch list, you’ll need to determine when to trade a pattern breakout.
This is a crucial step in the process—one that can be the difference between making consistent gains and draining your brokerage account.

11. PATTERN BREAKOUTS: CONFIRMATION IS CRITICAL
Newer traders have a tendency to jump on every chart pattern breakout without confirming the move. This can be a dangerous practice—especially in a choppy market. That’s why you should “filter” your breakouts using both price and volume.
The secret here lies in being selective. Here are a couple of general rules:
First, don’t buy a breakout unless the stock closes above the breakout price—or penetrates resistance by a pre-determined percentage. This will help guard against intraday whipsaws.
Next, closely monitor volume on all upside breakouts. You want to see volume expand as the stock price moves higher. Don’t risk your money on breakouts that occur on weak volume. If more and more buyers aren’t willing to pay higher prices for the stock, chances are it will soon fall back below your breakout zone.

12. DON’T HOLD OUT FOR PERFECTION
 When identifying chart patterns, you might find yourself searching for the perfect set-up as study charts are selected as examples because they are ideal specimens. In reality, not every head & shoulders pattern will be perfectly formed.
You might also find it difficult to draw perfect support and resistance lines on some charts.
With time, you’ll find that every pattern doesn’t need to be perfect. While you’re developing your trading instincts, you might want to add a few of these “imperfect” charts to your watch list to see how they ultimately play out.
Remember, even the most ideal chart pattern might not work out in your favor. That’s one of the risks you take as a trader (and the reason you should always set and obey your stop loss). On the flip side, some of these not-so- beautiful charts can turn into great trades.
An imperfect ascending triangle that has a clear resistance area should be watched for a breakout.
The same goes for an inverse head & shoulders that’s not perfectly symmetrical. Don’t obsess over the shapes as the important forces are the buyers and sellers creating these charts.
If support is imperfect– yet resistance is clearly broken—there’s no reason you wouldn’t want to trade the stock.
Here’s an example:

13. IMPORTANT CONCEPTS
There are several concepts that need to be understood before reading about specific chart patterns.
The first is a trendline, which is a line drawn on a chart to signal a level of support or resistance for the price of the security.
Support trendlines are the levels at which prices have difficulty falling below.
Conversely, a resistance trendline illustrates the level at which prices have a hard time going above.
These trendlines can be constant price levels, such as $50, or rise or fall in the direction of the trend as time goes on. 

14. VOLUME AND CHART PATTERNS
Why Volume is Important  Volume is an important aspect of technical analysis because it is used to confirm trends and chart patterns. Any price movement up or down with relatively high volume is seen as a stronger, more relevant move than a similar move with weak volume. Therefore, if you are looking at a large price movement, you should also examine the volume to see whether it tells the same story. 
The other use of volume is to confirm chart patterns. Patterns such as head and shoulders, triangles, flags and other price patterns can be confirmed with volume.
In most chart patterns, there are several pivotal points that are vital to what the chart is able to convey to chartists. Basically, if the volume is not there to confirm the pivotal moments of a chart pattern, the quality of the signal formed by the pattern is weakened. 
Volume Precedes Price  Another important idea in technical analysis is that price is preceded by volume. Volume is closely monitored by technicians and chartists to form ideas on upcoming trend reversals. If volume is starting to decrease in an uptrend, it is usually a sign that the upward run is about to end. 

15. HEAD AND SHOULDERS
The Head & Shoulder Pattern is a trend reversal pattern and often seen in a phase 3 topping price action.
Head and Shoulders are known as reversal chart patterns and are formed after an extended price move to the upside. The completion of this chart pattern denotes a trend reversal and in this case from an uptrend into a downtrend.
You can identify the Head and Shoulder chart patterns when doing your chart analysis by its distinct left shoulder, head in the middle, right shoulder all supported by a prominent support area which is known as the neckline.
As with other chart patterns, these come in other variations and by that we mean that it is sometimes the left shoulder can be higher than right shoulder or right shoulder can be higher than left or sometimes they can be equal.
This Head and Shoulders reversal pattern like other chart patterns analysis comes into its own when significant areas of support resistance are broken and confirmed.
3 ways to Trade Head and Shoulders:
Very Aggressive – When price action of the right shoulder fails to reach the price level of the head and reverses in an aggressive manner. Implement a candle stick formation for entry. This is considered a low odds trade and you will be stopped out more often.
Less Aggressive – Price breaks neckline support area and closes underneath. This has a bigger stop loss but is more confirmation that it’s on its way down.
Might Miss – Price retests the neckline support area which is now the resistance area.

16. SLOPE OF THE NECKLINE Price Objective
Another key factor in the head-and-shoulders pattern is the formation of the neckline.
The reason being that the neckline acts as support or resistance during the formation of the pattern, along with being the entry point at which the pattern confirms itself.
In most cases, the neckline will in fact be slanted either up or down.
In general, a technically strong head-and- shoulders top should have a flat or slightly upward-trending neckline, similar to the one shown in the chart.
For a head-and-shoulders bottom, it should be flat or slightly downward.
Price Objective
While the price's direction is already known, based on the signal, what needs to be calculated is the projected price movement.
This is done so that targets can be set, protective stops can be instituted and the worth of a trade can be evaluated.
This is measured based on the height of the chart pattern, which is essentially the distance in price between the peak of the head and the neckline

17. STEPS TO RECOGNIZE PATTERN
Establish Trend – The Head and Shoulder needs a long term established trend to reverse. It has to be formed after a significant uptrend. 
Left Shoulder – This price action is normally contained in the upward major trend line within the significant uptrend and you will see that the price will test the trend line which will also correlates to what will later become the neckline.
Head – After the left shoulder has been created and price action starts moving upwards you will see it will take out the prior pivot high of the left shoulder making a new high. At this point keep an eye on volume as you will normally see it dry up and the price will start returning back to the area of support (neckline).
Right Shoulder – Now the area of support has been created the price action can now begin to test the price action of the head. This rally will exhaust itself before reaching the high price of the head and will be known as what we call a failure to take out previous high. This is the first major bearish signal.
Neckline – Now the left shoulder has been formed and the head is starting to pull back down to create the right shoulder we can draw in what we call a neckline (trendline). This can be drawn off the retracement of the left shoulder which is when the price rallies up to create the right shoulder.
Neckline Break – Now that the right shoulder has been establish and price has been rejected price will retrace to the neckline area. As the pattern has been created over a 2-3 month period the neckline area will more often than not be tested a few times before breaking. Only after the support of the neckline has been broken and the price action has closed under neckline support can we be sure that the pattern is confirmed.
Resistance – What was neckline support now becomes neckline resistance and more often than not will be tested by the price and rejected.

18. HEAD AND SHOULDERS
The Head-and-Shoulders Pattern is one of the most popular and reliable chart patterns which looks like a head with two shoulders.
It is a reversal pattern that, when formed, signals the security is likely to move against the previous trend.
There are two versions of the head-and-shoulders pattern.
The head-and-shoulders top is a signal that a security's price is set to fall, once the pattern is complete, and is usually formed at the peak of an upward trend.
The second version, the head-and-shoulders bottom (also known as inverse head and shoulders), signals that a security's price is set to rise and usually forms during a downward trend.
There are 4 parts to head-and-shoulders: two shoulders, a head and a neckline.
The patterns are confirmed when the neckline is broken, after the formation of the 2nd shoulder.
The head and shoulders are sets of peaks and troughs.
The neckline is a level of  support  or  resistance.
The head and shoulders pattern is based on Dow Theory's peak-and-trough analysis.
An upward trend, for example, is seen as a period of successive rising peaks and rising troughs.
A downward trend, on the other hand, is a period of falling peaks and troughs.
The head-and-shoulders pattern illustrates a weakening in a trend where there is deterioration in the peaks and troughs.

19. HEAD AND SHOULDERS TOP
 The head-and-shoulders top signals to chart users that a security's price is likely to make a downward move, especially after it breaks below the neckline of the pattern.
Due to this pattern forming mostly at the peaks of upward trends, it is considered to be a trend-reversal pattern, as the security heads down after the pattern's completion.
This pattern has 4 main steps for it to complete itself and signal the reversal.
The 1st step is the formation of the left shoulder, formed when the security reaches a new high and retraces to a new low.
The 2nd step is the formation of the head, when the security reaches a higher high, then retraces back near the low formed in the left shoulder.
The 3rd step is the formation of the right shoulder, formed with a high that is lower than the high formed in the head but is again followed by a retracement back to the low of the left shoulder.
The pattern is complete once the price falls below the neckline, which is a support line formed at the level of the lows reached at each of the three retracements mentioned above.

20. INVERSE HEAD AND SHOULDERS (HEAD-AND-SHOULDERS BOTTOM)
The head-and-shoulders bottom is the exact opposite of the head-and- shoulders top, and signals that the security is set to move upward.
At the end of a downtrend, the inverse head and shoulders is considered to be a reversal pattern, as the security can head higher on completion of the pattern.
Again, there are 4 steps to this pattern:
(1) Starts with the formation of the left shoulder, when the price falls to a new low and rallies to a high.
(2) The formation of the head, when the price moves to a low that is below the previous low, followed by a return to the previous high. This move creates the neckline for this chart pattern.
(3) The formation of the right shoulder, which sees a sell-off, but to a low that is higher than the previous one, followed by a return to the neckline.
(4) The pattern is complete when the price breaks above the neckline.

21. THE BREAKING OF THE NECKLINE AND THE POTENTIAL RETURN MOVE
When the head-and-shoulders neckline is broken:
The trend is considered reversed, and the security should be heading in a new direction.
The point of breakout is when most traders following the pattern would enter the security.
However, the security will not always just continue in the direction suggested by the pattern after the breakout.
It's important to be aware of what is known as a "throwback" move.
This situation occurs when the price breaks through the neckline, setting a new high or low (depending on the pattern), followed by a retreat back to the neckline.
This move back to the neckline is considered to be a test of the pattern and the newly reversed support or resistance.
Remember that when a trend shifts (or a reversal pattern is confirmed), what was once support now become resistance, and vice versa.
In the case of an inverse head-and-shoulders pattern (as shown in the chart above), the neckline represented a level of resistance for the security before it broke out.
Upon the security moving above the neckline to confirm the pattern, the restrictive neckline becomes support for any move back up.

22. REMEMBER
While it can be alarming to see a security move in the opposite direction of the trend suggested by the pattern, it isn't all that bad.
The reason being that the successful test of this new level of support or resistance helps to strengthen the pattern and its suggested new direction.
So, it's important to wait for the pattern to test out and not sell out too quickly - before the pattern makes its bigger moves.

24. VOLUME
For the head-and-shoulders pattern, volume is used mainly at the point of breakout to help confirm the pattern.
At this point, it's important that the breakout happens on a large-volume move.
For a head-and-shoulders top, when the price breaks below the neckline (in a downward direction), it's best when this occurs during a large volume increase, which signals heavy selling.
This strongly indicates that the underlying supply and demand in the market is moving in the same direction the chart pattern is predicting.
Volume can also be used as a secondary indicator during the formation of the pattern, well before the breakout, to gain an idea of the pattern's strength.
For a head-and-shoulders top, the left shoulder should show heavy volume as it hits its new peak. Low volume should take the left shoulder down to the neckline.
The run towards the peak in the head should be on lighter volume compared to the peak formed in the left shoulder.

25. CUP AND HANDLE
The time to buy the stock, is as it emerges into new highs at the top of the handle and not the old high point set some 8 to 12 weeks ago.
The Cup & Handle is the corrective action after a powerful stock advance.
Generally a stock will have a powerful move of some 2 to 4 months, then go through a market correction.
The stock will sell off into the correction in a downward fashion for maybe 20 to 35 percent off the old high point.
The time factor is generally anywhere from 8 to 12 weeks depending on the overall market condition.
As the stock comes up to test the old highs, the stock will incur selling pressure by the people who bought at or near the old high. This selling pressure will make the stock price drift in a sideways fashion with a bias to the downside for about 4 days to 3 weeks.
The handle is generally about 5% below the old high point. A handle that is any lower is generally a defective stock and contains higher risk for failure.

26. STEPS TO RECOGNIZE PATTERN
Trend: To qualify as a continuation pattern, a prior trend should exist. Ideally, the trend should be a few months old and not too mature. The more mature the trend, the less chance that the pattern marks a continuation or the less upside potential.
Cup: The cup should be “U” shaped and resemble a bowl or rounding bottom. A “V” shaped bottom would be considered too sharp of a reversal to qualify. The softer “U” shape ensures that the cup is a consolidation pattern with valid support at the bottom of the “U”. The perfect pattern would have equal highs on both sides of the cup, but this is not always the case.
Cup Depth: Ideally, the depth of the cup should retrace 1/3 or less of the previous advance. However, with volatile markets and over-reactions, the retracement could range from 1/3 to 1/2. In extreme situations, the maximum retracement could be 2/3, which conforms with Dow Theory.
Handle: After the high forms on the right side of the cup, there is a pullback that forms the handle. Sometimes this handle resembles a flag or pennant that slopes downward, other times it is just a short pullback. The handle represents the final consolidation/pullback before the big breakout and can retrace up to 1/3 of the cup's advance, but usually not more. The smaller the retracement, the more bullish the formation and significant the breakout. Sometimes it is prudent to wait for a break above the resistanceline established by the highs of the cup.
Duration: The cup can extend from 1 to 6 months, sometimes longer on weekly charts. The handle can be from 1 week to many weeks and ideally completes within 1-4 weeks.
Volume: There should be a substantial increase in volume on the breakout above the handle's resistance.
Target: The projected advance after breakout can be estimated by measuring the distance from the right peak of the cup to the bottom of the cup.

28. DOUBLE TOPS
A reversal pattern illustrating a security's attempt to continue an existing trend. Upon several attempts to move higher, the trend is reversed and a new trend begins. Pattern formed will often resemble what looks like an "M" (double top).
The double-top pattern is found at the peaks of an upward trend and is a clear signal that the preceding upward trend is weakening and that buyers are losing interest. Upon completion of this pattern, the trend is considered to be reversed and the security is expected to move lower.
The first stage of this pattern is the creation of a new high during the upward trend, which peaking faces resistance and sells off to a level of support.
The next stage of this pattern will see the price start to move back towards the level of resistance found in the previous run-up, which again sells off back to the support level.
The pattern is completed when the security falls below (or breaks down) the support level that had backstopped each move the security made, thus marking the beginnings of a downward trend.
It's important to note that the price does not need to touch the level of resistance but should be close to the prior peak.
Also, when using this chart pattern one should wait for the price to break below the key level of support before entering. Trading before the signal is formed can yield disastrous results.

30. DOUBLE BOTTOM
This is the opposite chart pattern of the double top as it signals a reversal of the downtrend into an uptrend. This pattern will closely resemble the shape of a "W".
The double bottom is formed when a downtrend sets a new low in the price movement.
This downward move will find support, which prevents the security from moving lower.
Upon finding support, the security will rally to a new high, which forms the security's resistance point.
The next stage of this pattern is another sell-off that takes the security down to the previous low.
These two support tests form the two bottoms in the chart pattern. But again, the security finds support and heads back up.
The pattern is confirmed when the price moves above the resistance the security faced on the prior move up.
Remember that the security needs to break through the support line to signal a reversal in the downward trend and should be done on higher volume.
As in the double top, do not be surprised if the price returns to the breakout point to test the new support level in the upward trend.

32. RECTANGULAR CHART PATTERNS
The Channel Pattern
Channel Patterns should generally be considered as a continuation patterns. They are indecision areas that are usually resolved in the direction of the trend. Research has shown that this is true far more often than not, of course, the trend lines run parallel in a rectangle. Supply and demand seems evenly balanced at the moment. Buyers and sellers also seem equally matched. The same 'highs' are constantly tested, as are the same 'lows'. The stock vacillates between two clearly set parameters.
While volume doesn't seem to suffer like it does in other patterns, there usually is a lessening of activity within the pattern. But like the others, volume should noticeably increase on the breakout.

34. BULL PRICE CHANNEL
Channel patterns are composed of parallel trendline support and trendline resistance.
Channel Up - both support and resistance trendlines slope upward
Channel - both support and resistance trendlines are horizontal
Channel Down - both support and resistance trendlines slope downward

36. BEAR PRICE CHANNEL
Channel patterns are composed of parallel trendline support and trendline resistance.
Channel Up - both support and resistance trendlines slope upward
Channel - both support and resistance trendlines are horizontal
Channel Down - both support and resistance trendlines slope downward

38. TRIANGLE PATTERNS
Triangle patterns are composed of converging trendline support and trendline resistance, where one of the trendlines is horizontal.
Triangle Ascending - upward trendline support and horizontal trendline resistance
Triangle Descending - horizontal trendline support and downward trendline resistance

40. DESCENDING TRIANGLE PATTERN

41. ASCENDING TRIANGLE PATTERN