After discussing at length the head-and-shoulders and double- and triple-top (and bottom) reversal patterns, we turn now to three additional formations of stock reversals: the saucer, the spike, and the rising (or falling) wedge.
The Saucer Formation
The saucer formation (also lecherously referred to as a “rounded bottom”) is a slow, saucer-shaped transition from bearish to bullish price action that looks like this:
The action is similar to a head-and-shoulders pattern, but without any discernible shoulders.
Though the pattern is not dependent on volume, trade generally gains on the decline side of the saucer and then picks up again at the top of the advance side, though this is not essential for the formation to be valid.
It’s less often seen, but a “rounded top” is the exact opposite pattern. It looks like this:
In both cases, the pattern takes a long time to unfold – anywhere between six to 18 months. And, of course, the longer it takes, the more valid the signal is.
Buy and sell signals are found at the top and bottom edges, respectively, of the saucer.
Spike reversals consist of one or more days of extreme higher or lower action that reverse virtually immediately. It is necessary to see a significant volume surge surrounding the spike to confirm the formation.
Here is an example of a spike top. Note the extreme volume figures (in green) that accompany the action directly before and after the peak.
Because of the associated volume figures, this pattern became tradable directly after the spike top. One or two days of falling action (in blue) is ample signal to jump in on the short side.
The following chart depicts a spike bottom. Here again, a doubling in daily average volume is sufficient indication that the stock is trading toward a spike bottom (in green).
Any of the subsequent up days (in blue) would have provided an excellent entry point on the long side.
A long position initiated on one of the blue boxed days would have yielded a 60% gain in six weeks.
Wedges come in two distinct varieties: the falling wedge, a bullish indicator; and the rising wedge, a bearish one.
This is an example of a falling wedge. Note that the wedge consists of two downward sloping lines that are converging. Eventually volume expands, the pressure builds and a breakout ensues.
A surge in volume directly after the breakout (mid-March) offers confirmation that the bulls are now laced up and running.
The buy point is situated precisely on the day of the breakout, and in this case, leads to a nearly 50% gain in less than three months (in blue).
A rising wedge is the exact opposite formation. It looks like this:
Here, too, volume builds into the peak of the formation before the ultimate break. At that point, several more days of higher trade numbers confirm the reversal is for real.
A sell signal is triggered on the day the break occurs.
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