Momentum patterns

There are trending and non-trending chart patterns; trying to apply the incorrect chart pattern to the market will most likely lead to a poor trade entry. The goal is to use patterns that provide clearly defined levels for the current market condition.

Because the objective here is to capitalize on sideways markets, let’s examine which chart patterns are ideal for momentum entries.

A triangle is formed between converging support and resistance lines. A down-sloping resistance line indicates a declining level of profit taking, or more uncertainty about the value of the stock. An upward-sloping support line squeezes price into a corner. Once the support or resistance line is broken, pressure that has built up as a result of uncertainty is released and momentum is added to the price change in the direction of the breakout.

Ascending and descending triangles are specific types of triangle patterns. An ascending triangle has a horizontal resistance line and a descending triangle has a horizontal support line. An ascending triangle usually forms as a continuation of a bullish trend, while a descending triangle typically forms as a continuation of a bearish trend.

Double tops and double bottoms are reversal patterns that touch either the support or resistance lines twice before reversing the trend. Triple tops and triple bottoms are reversal patterns that touch either the support or resistance lines three times before reversing the trend. A triple top or bottom is a stronger indicator of trend change than a double top or bottom. For both types of patterns, look for a strong initial trend and a significant breakout to confirm the reversal.

Also referred to as a sideways channel, a rectangle is a pattern formed between horizontal support and resistance lines.