CHARTING

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Short Signals
Identifying Bearish Chart Patterns (II)
by Thomas N. Bulkowski

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Here's the second and final installment about bearish chart patterns.

Someone I know once made the bold statement that there is a chart pattern for any trend that ends. I don't know if that's true, but here are 10 bearish patterns you should know about.

ISLAND REVERSAL

Island tops are some of the easiest patterns to recognize. Figure 1 shows an example. Prices gap upward, meander around, then gap down. The gaps align, meaning that they share at least one common price. Thus, price seems to hover like a blimp above the surrounding countryside. Usually, prices move up and away from the two gaps, leaving clear sky below, as shown by the horizontal line in the figure. At other times, prices will dip down and close the first gap, but that should not detract from the pattern - it just makes islands harder to spot./P>

FIGURE 1: ISLAND TOP. Gaps set off an island. The gaps should share a common price level.

Look for a two-gap pattern after a rising price trend. The gaps must have some prices in common to set off the island.

How far will prices decline? Find the predicted decline by first subtracting the lowest low from the highest high in the pattern. That gives the pattern's height. Next, subtract the height from the lowest low to get the price target. In the 245 patterns I looked at, the decline averaged 21%, about par for all bearish chart pattern types, and they met or exceeded the price target 78% of the time.

...Continued in the January 2004 issue of Technical Analysis of STOCKS & COMMODITIES

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Excerpted from an article originally published in the January 2004 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2003, Technical Analysis, Inc.

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