Major reversal patterns

example 1

This top took two years to form and showed a pattern of lower highs with a downward
trend line. When the support at D failed the stock moved down sharply. The top essentially shows a balance between demand and supply. The breakdown shows that supply won the battle.

Experience has shown that if a stock is held until the deterioration in the fundamentals
has been publicly acknowledged the stock has already completed much of its decline.
In my opinion the bad news leaks into the market and investors will act on this
anticipation ahead of the actual announcements. The stock market always acts in anticipation of expected events and news.

Major tops – example 2

This example shows a top almost 20 columns wide. The width of the top in many ways forecasts the extent of the decline. The decline started with a triple bottom sell signal but shortly thereafter - a negative news item caused a dramatic one-day plunge in the stock.
The stock has recently started to base but it remains far below the bearish resistance line.

Experience indicates that the “sell” decision is more heavily weighted toward the technical method of analysis. Invariably the tip-off is a stock with apparently great fundamentals that consistently acts poorly on the relative strength charts. You can assume there is a good reason behind the poor performance. Rarely is it just an accident or purely a coincidence.

Major tops – example 3

This is an example of a major top in a Dow Jones Industrial Average stock. The stock fell sharply away from the top. Throughout ’99 the stock appeared to be basing but this turned out to be a ledge and the stock broke to new relative strength lows. The 45-degree bearish resistance line confined the stock to a downtrend during the entire decline.

By W. Clay Allen CFA