In the world of technical analysis, right next to support/resistance and trendlines, chart patterns are a core building block. Some outsiders to technical analysis consider this realm of technical analysis to be so esoteric and “mystical” that it turns them off. This is very unfortunate, because the principles at work in the formation of these chart patterns are simply a reflection of good ole’ Econ 101 supply and demand.
Perhaps it is the names that are attached to these patterns that give cause to the skeptical eye. If the Head & Shoulders pattern was renamed to something “academic” sounding like the “Demand/Supply Transition” pattern, it may be more acceptable.
One of the tenets of technical analysis is that markets trend. It has been observed that during the course of trend formation and trend reversal, prices often move in a repeatable, predictable fashion. These observed price movements that occur during trend formation and during trend reversals have been labeled and given names. These are what we call chart patterns.
CPR (John Murphy – Chart Pattern Recognition) identifies six classical trend reversal patterns and three classical trend continuation patterns. The trend reversal patterns include: Head & Shoulder Tops, Head & Shoulder Bottoms, Triple Tops, Triple Bottoms, Double Tops, and Double Bottoms. The trend continuation patterns include: Symmetrical Triangles, Ascending Triangles, and Descending Triangles.