Technical Analysis of the Financial Markets: Ch 5

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This is a review of the fifth chapter of John J. Murphy’s Technical Analysis of the Financial Markets.

Major Reversal Patterns

The 5 most commonly used reversal patterns are:

1. Head & Shoulders
2. Triple Tops & Bottoms
3. Double Tops & Bottoms
4. Spike (or V) Tops & Bottoms
5. Rounding (or Saucer)

Things to keep in mind while looking at reversal patterns:

1. A prior trend should exist (the market should have something to reverse)
2. The first sign of impending reversal is the breaking of a trendline
3. The larger the pattern, the greater the impending move
4. Topping patterns are usually steeper and more volatile than bottoms
5. Bottoms have smaller price ranges and take longer to build
6. Volume is more important on the upside

We will examine each of the 5 patterns above in subsequent posts.