Written and copyright © 2009-2013 by Thomas N. Bulkowski. All rights reserved.
This article discusses the carnage that ensues when two chart patterns appear on the same chart at the same time. Will the world survive? Let's find out.
When Patterns Collide: Same Time, Two Patterns
A question that comes across the ether every year or so is what happens when two chart patterns appear on the chart at the same time? Which do you believe?
The chart of PEJ -- PowerShares Dynamic Leisure & Entertainment exchange traded fund -- shows such a situation.
Along the top of the chart are peaks 1, 2, and 3. Many of you
will recognize that pattern as the start of a triple top. Connecting valleys 4, 5, and
6 form another pattern called a right-angled broadening formation, descending. I show the outline of what that pattern looks
like in the inset.
In short, we have two chart patterns that appear on the same chart at the same time. Which is right?
When Patterns Collide: Divide and Conquer
Let's take each pattern separately. The triple top isn't really a triple top, is it? Do you know why? The answer is the same for many chart patterns. The triple top is just
three peaks on a chart, but it does not become a valid triple top until price confirms the pattern. That means price has to close below the lowest valley between the three tops --
valley 6. Clearly, that hasn't happened yet.
However, a triple top is bearish. When confirmed, it signals a downward move. Even the drop to 6 will give holders of the stock a stomachache.
What about the broadening pattern? That pattern does not have to prove confirmation. As long as the pattern obeys the identification guidelines outlined in my
Encyclopedia of Chart Patterns book (pictured), then everything is fine.
In this example, the pattern does obey the guidelines, so it's a valid pattern.
What about the breakout direction? For this broadening pattern, the breakout direction is upward 51% of the time -- random, in other words.
When Patterns Collide: What to Do?
When patterns collide and both are bearish, or both are bullish, then you don't have a problem. When one is bullish and the other is bearish, you still don't have a problem. Why?
Because you should always trend in the direction of the breakout.
It's as simple as that.
-- Thomas Bulkowski
Written and copyright © 2009-2013 by Thomas N. Bulkowski. All rights reserved. Humans were created by water to transport it uphill.