If you're looking for to learn about the stock market, technical analysis offers you a powerful tool with which to read the stock market's movements. If you're looking to gain some advantage over other traders in regard when to buy into a stock, these are some of the chart patterns you should look for.
Double Bottom, also known as “W”
With this pattern, the stock is often in a downtrend from a previous high. The downtrend continues for a while until one day it stops and the stock turns around, seemingly unexpectedly, though usually it's good news from the company. This price movement creates the first down leg of the “W”. Then, as investors hear the good news, they pile into the stock raising its price again. However, those investors who bought the stock when it was falling want to get out and so they sell their shares. This price movement creates the middle of the “W”. The final leg of the “W” is a critical stage as the stock price can literally go any direction. Often investors will learn whether or not the news wasn't good enough, or if it was the “real deal” so to speak. If it's the “real deal”, then the price will usually hit its previous low and then rebound upwards, thus forming the last leg of the “W”. Look at the chart below and you'll notice that you will have to wait patiently to see how the stock behaves. Patience is key in determining the “W”, or double bottom, formation.
Cup with handle
This chart pattern features a stock price moving sideways. The price seems to trade within a range, making lower highs and lows, creating the left side of the “cup”. The price will then slowly gain traction until it reaches its previous high, thus forming the right side of the “cup”. Finally, the distinguishing characteristic of the cup-with-handle pattern is the breakout that occurs from the previous high to new highs, thus creating the “handle” of the “cup”. Take a look at the chart below and notice how the price moves lower, stops, muddles around a price point for a while, then moves up again before breaking out into new highs.
Head and Shoulders Bottom
This pattern also takes some time to develop and can sometimes look like the “W” pattern described above. The difference in this chart pattern, however, is that the middle portion drops lower. As the stock price declines the first part of the left “shoulder” is formed. Then, some news might come out that raises investors' hopes, sending the price back up, completing a V-pattern and the “left shoulder”. But soon the news or whatever the event proves not enough and sends the price back down, creating the “head”. Investors are downtrodden at this point and the stock seems to be at its worst, and that's when it can turn around. As investors buy back in, the price rises, but there isn't enough support since some people who bought during the "eflt shoulder" sell their shares to recoup their losses. Finally, a second “shoulder” will be created before investor confidence returns and the stock prices charges through its previous high from the “left shoulder”. Take a look at the picture below and study it carefully, you've probably seen it more times than you realize.