3.1. Consolidation figures

3.1.1. Symmetric triangles

Apart from channels, it is important to notice that trend line associations are not necessarily parallel. It is possible to have other significant figures appear, the most common being triangles. These do not constitute trend figures, but consolidation ones.

Symmetric triangle figures (cf. graph below) are the most frequently used. They are formed by a downward resistance line and an upward support line. The spot price thus comes bumping against the upper line and landing on the lower line, in smaller and smaller moves due to the crossing of both trend lines. The more often the price comes on both lines, the more valid the figure is (the minimum being of course two impacts so as to determine the lines orientation).

This figure is quite common in the case of long term trends. That is, the exit direction when the figure is broken is in the continuation of the entry direction. This exit normally occurs before the top of the triangle, usually near three quarters of its length (measured from the impact on the second trend line). The form of the figure itself, getting narrower, explains that the power “accumulated” by the stock suddenly appears at the end of the figure, the share moving considerably, often with much higher volumes.

With this formation too, it is possible to determine targets. Indeed, it is often standing, in the case of an upward consolidation, on the parallel line to the support line going through the first impact point (resistance line). Another target corresponds to the triangle height used at the exit point. In both cases, this level has to be reached before the date corresponding to the top of the triangle (cf. graph)

3.1.2. Flag

Another consolidation form exists, under the form of a channel, called flag. It corresponds to a slightly decreasing channel (in the case of an upward trend) or a slightly increasing channel (in the case of a downward trend). In terms of targets, this figure often occurs in the middle of a trend, which means that one can move the height of the segment preceding the flag to the exit of the figure.

3.2.1. Double tops and double bottoms

The preceding figures are all related to trend lines so as to delimit them. Still, other figures exist, called formal figures, which are defined by their sole appearance.

They then are reversal figures: the stock trend is reversing on these levels. The most significant of these figures is the double top (on the upside) and the double bottom (on the downside). As shown below, these formations correspond to two consecutive tops (or bottoms).

These figures are often characterized by lower volumes during the second extreme, showing the decreasing interest of investors and the expectation of a trend reversal.

In terms of target, it can be found by moving the height of the double top (or bottom) figure itself at the level of the end of the figure (cf. graph).

3.2.2. Head-and-shoulders

From this figure head-and-shoulders is derived. This expression comes from the form of the figure, showing three consecutive tops, the first one and the third one being of the same height while the second one is higher (cf. graph).

The main element of this figure is what is called “neckline”, corresponding to a horizontal line joining the low points of the second top. Indeed, this figures often characterizes a trend reversal.

Up to the second top (head), the stock is standing on a bullish trend, which is broken down by drawing the second shoulder. It then reaches a downward trend, which is confirmed by the crossing down of the neckline after the second shoulder.

Still, one can often have a phenomenon called “pull back”, corresponding to a return of the price right under the neckline. This return often corresponds to a technical rebound, as it often occurs in low volumes.

More precisely, the appearance of the top (head) can be forecasted whenever volumes significantly fall, standing at a lower level compared to volumes reached during the first shoulder.

In terms of target, it is calculated just as the double top, by moving the figure height (head height relatively to the neckline) at the end of the figure (crossing down of the neckline). Of course, a symmetric figure can be drawn on the downside. It is then called reverse head-and-shoulders.