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Bar Chart Formations

Tom Ventresca
Tom Ventresca
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Reoccurring formations that typically precede significant price moves

The bar chart is the most common form of chart associated with stocks. A bar chart consists of open, high, low and closing prices plotted on a series of vertical lines. The following charts are examples of bar chart formations that frequently occur and are very reliable in predicting future price direction of a stock or index.

Cup And Handle Formations: This is a classic bullish formation that typically occurs after a stock has experienced a long and significant decline. Once the stock hits bottom, it enters a base building period in which there is little price movement over an extended period of time. This is referred to as the Cup. At some point, the stock experiences a sharp price rise followed by a small correction and then another price increase. This action is referred to as the Handle. The buy signal is given after the correction when price breaks out above the previous rallies high.

Gaps: An up gap occurs on a stock's chart when the stock's opening price is higher than the previous days high. In order for an up gap to occur, an abnormal influx of buy orders exceeding the available number of shares for sale must exist indicating that demand exceeds supply, a bullish condition. A down gap occurs when the opposite conditions exist. The stock opens at a lower price than the previous days low. This is a bearish condition in that the amount of stock for sale far exceeds the demand for the stock.

Pennant Formations: Pennant formations are very common and can be either bullish or bearish depending on how the formation is formed. A pennant or triangle resembles a flag with the pole being on the left side of the formation created by either a sharp rise in the stock's price or an acute decline. The flag or pennant is formed as the stock trades in an increasingly narrow range for several days, usually five to twenty. The longer that the flag process takes, the larger the ensuing move will be.

Typically, the stock will come out of the flag formation in the same direction that it came in. If a pennant is formed after a sharp rise, the odds favor a resumption of the advance once the stock breaks out to the upside. Conversely, a pennant formation formed after a sharp decline will see lower prices once the flag is broken to the downside.

The reason for this phenomenon is logical. Whatever caused the sharp rise or decline creating the "pole" was due to some fundamental change in the company, i.e. an earnings surprise, unexpected news release, etc. The flag is formed as the event is disseminated and opinions are formed. Usually, whatever caused the spike (pole) is resolved in favor of the event and price continues in the same direction as prior to the formation of the pennant.

Once the stock breaks out of the formation, measure the length of the pennant. Then place the ruler on a forty-five degree angle from the tip of the pennant and in the direction of the breakout. This will give you a good idea of a stocks near term price potential. Performing this exercise for BLDG projected an upside move to 36.25. For BGC the downward projection was 26.40.

Market Edge produces a daily report called Special Situations, which isolates those stocks with noteworthy chart formations or those that experienced unusual activity during the previous days trading session.  The reports include stocks with gaps, abnormal volume and price surges and those within 1 point of support and resistance areas as well as those making new 52 week highs and lows. It is located under the Analysis button.

Tom Ventresca will be available to take your questions until Monday, December 12. Please use the form below to submit your questions.

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