As of 12/06/2024
  Indus: 44,643 -123.19 -0.3%  
  Trans: 16,879 -97.04 -0.6%  
  Utils: 1,036 -11.79 -1.1%  
  Nasdaq: 19,860 +159.51 +0.8%  
  S&P 500: 6,090 +15.16 +0.2%  
YTD
 +18.4%  
 +6.2%  
 +17.4%  
 +32.3%  
 +27.7%  
  Targets    Overview: 12/02/2024  
  Down arrow44,000 or 46,000 by 12/15/2024
  Down arrow17,025 or 18,000 by 12/15/2024
  Down arrow1,025 or 1,100 by 12/15/2024
  Up arrow20,000 or 18,500 by 12/15/2024
  Up arrow6,200 or 5,900 by 12/15/2024
As of 12/06/2024
  Indus: 44,643 -123.19 -0.3%  
  Trans: 16,879 -97.04 -0.6%  
  Utils: 1,036 -11.79 -1.1%  
  Nasdaq: 19,860 +159.51 +0.8%  
  S&P 500: 6,090 +15.16 +0.2%  
YTD
 +18.4%  
 +6.2%  
 +17.4%  
 +32.3%  
 +27.7%  
  Targets    Overview: 12/02/2024  
  Down arrow44,000 or 46,000 by 12/15/2024
  Down arrow17,025 or 18,000 by 12/15/2024
  Down arrow1,025 or 1,100 by 12/15/2024
  Up arrow20,000 or 18,500 by 12/15/2024
  Up arrow6,200 or 5,900 by 12/15/2024

Bulkowski's When Patterns Collide

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

Picture of powershares dynamic leisure (PEJ) on the daily scale.

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 Second EditionEncyclopedia of Chart Patterns 2nd Edition book. 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

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