Nine very basic chart patterns which signal a change in trend

Following are a number of reversals based on only several days of action. They can be very useful when used in combination with the overall chart pattern and when used with other technical tools. The point should be emphasized that these factors or formations used by themselves can result in trouble and lead to whipsaw action. The intent is to introduce a concept or way of thinking.

Several things can happen once a minor reversal formation is set up.

1. The reversal formation is a true and valid indication of a trend change or the beginning of a congestion phase. If this occurs, market will have carry-through or holding action on the day or days following such action.
2. An equally effective and opposite formation will form almost immediately. One should go with the latest one.
3. After the signal, a complete failure may occur within 1-2 days. The trade should be abandoned immediately and perhaps an opposite position taken.

We have experienced and recommend the following:

1. If these formations are against the prevailing trend, they should be viewed as indicating the beginning of a congestion phase. More evidence is needed for a true major trend reversal.
2. They are excellent tools for use in marking the end of a corrective phase.

1. ISLAND REVERSAL :- High, low and close on the day preceding and following high day are entirely below the range of the high day. Last days action should reverse at least two closes. The close should be below the opening and mid-range. This is one of the strongest types that is seldom false. Island can be one day or many days. It represents a drastic change in sentiment and leaves one side trapped. This losing side will generally cover either on this day or on next reaction. The reverse characteristics are required for the bottom formation.
2. REVERSAL GAP :- Low on the last day is entirely above the preceding days action. The close should reverse at least two closes and close above the opening and mid-range. Reversal gaps can be one of the strongest indicators of a reversal in trend. They are seldom false. Best indicator is when preceding action has shown narrowing of spread and drying up of volume.
3. PATTERN GAP :- Low is above the close of the previous day. Close is above opening mid-range and previous days high. Close should reverse at least two closes.
4. THREE DAY HIGH REVERSAL :- Three days of relatively narrow ranges are followed by a day with a wide spread which closes above the high of the previous three days. Close should be above the opening and mid-range.
5. FOUR DAY CLOSE REVERSAL :- A close on the fifth day is above the four previous closes. The close should be above opening or mid-range. The four closes should be in close proximity to one another.
6. THREE DAY CLOSE REVERSAL :- Close is above the previous three closes. High is above the high of previous three days. Low is above the low of the last three days. Close should be above the opening and mid-range. Spread should be larger than the average of last three days.
7. TOP OR BOTTOM TAILS :- Market closes higher for three days in the top part of the trading range.
   • On Top :- It indicates supply coming in. First time it does this is not too significant. However, it indicates important supply if this happens a second or more times. It is a greater sign of weakness if each successive tail is at a lower level and volume picks up. Same holds true for a bottom, only in reverse.
8. NARROW RANGE AFTER ADVANCE OR DECLINE :- A sharply accelerated movement followed by a narrow range day is required. An opposite movement then takes place with a widening spread. Close should be below mid-range, opening and the low of the top narrow range day. At least two closes should be reversed.
   • Top :- If a market is moving up and then has a sharply accelerated movement followed by a narrow range day, it indicates buying power is temporarily exhausted. There is a vacuum as nervous short have all covered. Temporary end of move is almost assured if you have action as shown after narrow range day. This is a case of supply overcoming demand.
   • Bottom :- Same as top, only in reverse.
9. NEW FIVE DAY HIGHS & CLOSES :- Market makes new highs for five successive days. Ignore inside days. Closes should accompany the new highs. This indicates a shifting of momentum to the upside. Market is generally a purchase on first reaction.