Reversal Formations
The End Of The Trend
by Cornelius Luca
You're riding along with the trend, watching your returns consistently increase. You know it's not going to go on forever... but how do you know when it'll end?
As much as we like trends and their inherent profitability, all good things must eventually come to an end. Dealing with their demise is easier said than done; it's not only that traders loathe parting with a good thing, but ending trends is often a messy affair that can take its toll on your budget. However, there are several reversal formations you can watch for that may give you a warning that the trend is almost over.
The most significant trend reversal patterns are the following:
1. Head & shoulders and inverse head & shouldersArguably, the second tier of reversal formations are:
2. Double top and double bottom
3. Triple top and triple bottom
4. V-top
1. Rounded top and rounded bottomThis article will analyze the head & shoulders formation, using currency pairs as examples.
2. Rectangle reversal
3. Diamond
4. Upthrust and spring
FIGURE 1: A HEAD & SHOULDERS FORMATION. Here you see a head & shoulders formation occur on the daily chart of the New Zealand dollar/US dollar.
...Continued in the December issue of Technical Analysis
of STOCKS & COMMODITIES
Excerpted from an article originally published in the December 2004 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2004, Technical Analysis, Inc.
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