115 CFA
File: Portfolio Management - Reading 56 - 4. Chart Patterns

4. Chart Patterns

d. describe common chart patterns;

What are the characteristics of a head and shoulders pattern?
The head and shoulders pattern looks like a head with two shoulders. It is formed by a peak (shoulder), followed by a higher peak (head), and then another lower peak (shoulder). A "neckline" is drawn by connecting the lowest points of the two troughs.

What is the implied trend of head and shoulders pattern?
The pattern is considered to be a trend-reversal pattern, as the security heads down after the pattern's completion.

What is a double-top (bottom) pattern and what is the implied trend?
A double top (or bottom) pattern is created when a price movement tests resistance level twice and is unable to break through. The trend then reverses and the price heads in the opposite direction.

What is a continuation pattern?
Continuation patterns indicate a pause in trend and indicate that the previous direction will resume after a period of time.

What is an ascending triangle continuation pattern?
The ascending triangle is a bullish formation that usually forms during an uptrend. Two or more equal highs form a horizontal line at the top. It implies the trend will continue upward.

What is the symmetrical triangle continuation pattern?
The pattern contains at least two lower highs and two higher lows. When these points are connected, the lines converge as they are extended and the symmetrical triangle takes shape.

What are flags and pennants?
Flags and pennants are short-term continuation patterns that mark a small consolidation before the previous move resumes.
- flag is a small rectangle pattern that slopes against the previous trend.
- pennant is a small symmetrical triangle that begins wide and converges as the pattern matures (like a cone). The slope is usually neutral.

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