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DOUBLE TOP

Figure 6 shows a classic double top, but they actually come in four varieties: Adam & Adam, Adam & Eve, Eve & Adam, and Eve   & Eve. An Adam top appears narrow, pointed, with perhaps a single spike at the top. An Eve top is more rounded, broader. The   figure shows an Eve & Eve double top. A twin top pattern is not a true double top until prices close below the lowest low in the   pattern. That's called the confirmation price, and Figure 6 shows an example. It's also the breakout price, and I found that prices   dropped 20% in the 454 patterns I looked at.

In a study of 1,280 twin peak formations, I found that 65% continued higher without dropping below the confirmation price. That's   why it's so important to wait for confirmation. If you own a stock in a bull market, chances are the price will continue rising. Don't   sell until you are sure the price is going down. That's not a license to let losses run away from you. Use common sense and good money management.

HEAD & SHOULDERS TOP

The head & shoulders top looks just like it sounds. First a left shoulder forms, then a higher head, then a right shoulder. A neckline   joins the shoulder valleys (the armpits, if you will). When prices close below the neckline, the pattern becomes a valid head &   shoulders top. Expect lower prices to the tune of 23%, on average.

When looking for head & shoulders tops, search for symmetry. Often, the shoulders will appear similar in width and height, and   will be nearly the same distance from the head. The typical volume pattern shows the highest volume on the left shoulder,   followed by the head, with the lowest volume on the right shoulder. That's a typical pattern, and Figure 7 shows a different   combination that occurs about a third of the time - volume is highest during formation of the head. If you have a volume pattern   that's different from the typical pattern, don't worry. It's price you should be worried about, because you can't deposit volume into your bank account.

If you own a stock showing a head & shoulders top, wait for confirmation, then sell. A pullback to the breakout price occurs about   45 % of the time, giving you another opportunity to dump it before the decline resumes. Take it or suffer the loss.

HEAD & SHOULDERS COMPLEX TOP

Now that you know how to find a head & shoulders top, look to the left and right of the pattern and search for additional houlders.   You will often find them. Figure 8 shows an example of a complex head & shoulders top. This one has two left shoulders, a single   head, and two right shoulders. Symmetry is important, and the two left shoulders often appear similar in width and shape to the   two right ones. The distance to the head is similar to its mirror image. For example, see how the inner left and right shoulders are   just two days wide and are about the same distance from the head? Their heights are not exact, but patterns are rarely perfect.

The outer left shoulder forms its own head & shoulders top, with the left shoulder high being the head of the smaller pattern.   Note   how a downsloping neckline - if it's steep enough - will never trigger a sell signal. For steep necklines, sell if prices drop below the   right shoulder valley (which will be the lower of the two armpits). The small head & shoulders doesn't really suffer from an   excessively steep neckline because prices do close below it, but you give up a few points waiting for a neckline confirmation.   Another example of a right-angled and ascending broadening formation appears in July.

HORN TOP

Horns are another pattern I discovered as I was searching for double tops on the weekly scale. Horns appear as two tall spikes   separated by a week and look like a steer's horns, hence the name. To identify them, switch to the weekly price chart and find two   upward spikes that appear longer than most others over the prior year. Expect a price variation between the two highs. Look for   clear visibility to the left of the pattern, meaning that the pattern should be at the top of a minor high like the one shown in Figure   9. The middle week of the three-week pattern should have a high well below the two outer spikes. The week after the pattern   should show prices dropping down, with the high price well below the horn top. The pattern confirms when prices close below the   lowest low in the three-bar pattern.

The average decline I measured in the 188 horn tops was 21%, which is about average for all bearish chart pattern types.

CLOSING POSITION

If you own a stock and see a bearish chart pattern forming, ask yourself how far prices might fall. Look for a support zone below   the pattern. Always wait for confirmation (that's usually when prices fall below the lowest low in the pattern) before selling. In a   bull market, the tendency is for prices to keep climbing, so it may pay to be patient.