When Patterns Collide

As of 05/30/2023

Indus: 33,043 -50.56 -0.2%

Trans: 13,966 +62.22 +0.4%

Utils: 892 -1.41 -0.2%

Nasdaq: 13,017 +41.74 +0.3%

S&P 500: 4,206 +0.07 +0.0%

YTD

-0.3%

+4.3%

-7.8%

+24.4%

+9.5%

Targets Overview: 05/30/2023

33,950 or 32,000 by 06/15/2023

14,600 or 13,350 by 06/15/2023

935 or 880 by 06/15/2023

13,600 or 12,200 by 06/15/2023

4,350 or 4,000 by 06/15/2023

Chart Pattern Indicator:

on 5/30/23

As of 05/30/2023

Indus: 33,043 -50.56 -0.2%

Trans: 13,966 +62.22 +0.4%

Utils: 892 -1.41 -0.2%

Nasdaq: 13,017 +41.74 +0.3%

S&P 500: 4,206 +0.07 +0.0%

YTD

-0.3%

+4.3%

-7.8%

+24.4%

+9.5%

Targets Overview: 05/30/2023

33,950 or 32,000 by 06/15/2023

14,600 or 13,350 by 06/15/2023

935 or 880 by 06/15/2023

13,600 or 12,200 by 06/15/2023

4,350 or 4,000 by 06/15/2023

Chart Pattern Indicator:

on 5/30/23

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

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 Edition

Encyclopedia 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.

Bulkowski's When Patterns Collide