Chart reading is an integral part of technical analysis. A chart pattern consists of a price chart. Different chart patterns convey bullish, bearish, or neutral tendencies.
No one best chart pattern works in all market environments. Some patterns are ideally suited for volatile markets, and others are best suited for stable markets. A few patterns work best when the trends of decisively bullish, and others work best in bearish downtrends.
It is crucial to identify the appropriate chart pattern based on specific market conditions. Utilizing the wrong pattern or not knowing which one to apply may result in missed opportunities and even losses. Well-defined patterns are not guaranteed to work. These patterns only convey an indication of the likelihood of the outcome.
Chart patterns fall into three categories – a continuation, reversal, and non-trending trading range.
Popular patterns include head and shoulders bottom/top, double top/double bottom, rounding bottom/top, cup and handle, rising/falling wedge, pennant or flag, ascending/descending triangle, symmetrical triangle, etc.
In summary, chart patterns are useful technical indicators that can identify the next directional trend of a stock. Since most chart patterns provide visible support and resistance levels, they can give investors and traders confidence to act before the trend reversal occurs.
Attached are some of the technical screens of the S&P 500 Index universe.
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