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Bearish Chart Patterns

Downtrend Channel  

This pattern is characterized by a series of lower lows and lower highs.  A line connecting the troughs is roughly parallel to a line connecting the peaks.  When a solid downtrend channel has been established, the stock may be sold short near the top line and covered near the bottom line.



Uptrend Reversal  

The uptrend reversal is similar to the uptrend channel, except the upward-sloping line that connects the troughs is broken on heavy volume.  It is common for the stock to test the breakout point.   A stock with this pattern should not be purchased.



"V" Top 

The "V" top is characterized by a sharp one-day reversal on heavy volume.  On the day of the reversal, the stock must make a higher high and lower low than the previous day's high and low.  Also, on the day of the reversal, the stock must close near the bottom of the day's range.  A weekly or monthly chart may also be used.  This pattern is not as bearish as the "W" top.



"W" Top or Double Top 

The "W" top consists of two distinct peaks.  Usually the second peak is not as high as the first.  Also, the second peak usually occurs on lighter volume.  It is wise to wait for the stock to fall below the dip between the peaks before selling.



Head and Shoulders Top 

The head and shoulders top occurs when a stock rises, dips, then rises again on heavy volume.  The second peak (the head) is higher than the first peak (the left shoulder).  The stock then creates a third peak (the right shoulder) on light volume.  It is wise to avoid the stock after it has crossed below the "neckline".



Descending Triangle 

The descending triangle consists of a series of troughs which occur at roughly the same price.  A line connecting the peaks form a downward-sloping line.  Usually, when the two lines converge the stock will breakout to the downside.  Once the stock has broken out, it will likely recover to the lower line before falling again.  It is wise to avoid a stock with this pattern.



Expanding Triangle 

The expanding triangle consists of a series of higher highs and lower lows.  This pattern suggest uncertainty among traders.   Usually, the stock will breakout of the pattern to the downside.




The diamond pattern is quite rare.  It is formed by two triangles--an expanding triangle and a symmetrical triangle.  Once the stock has fallen below the bottom line of the symmetrical triangle, the stock should be avoided.



Gap Down 

The gap down occurs when, after trading sideways for some time, a stock breaks out sharply to the downside.  The high of the breakout day or week should be significantly below the low of the previous day or week.   The gap usually is caused by some bearish company or analyst announcement.   Once the gap is created, it acts as a strong resistance area.



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