Identifying Bearish Chart Patterns (II) by Thomas N. Bulkowski
Here’s the second and final installment
about bearish chart patterns.
S omeone I know once
made the bold statement
that there is a
chart pattern for any
trend that ends. I
don’t know if that’s true, but here are 10 bearish patterns
you should know about.
Island tops are some of the easiest
patterns to recognize. Figure 1 shows
an example. Prices gap upward, meander
around, then gap down. The
gaps align, meaning that they share at
least one common price. Thus, price
seems to hover like a blimp above the
surrounding countryside. Usually,
prices move up and away from the
two gaps, leaving clear sky below, as
shown by the horizontal line in the
figure. At other times, prices will dip
down and close the first gap, but that
should not detract from the pattern —
it just makes islands harder to spot.
Look for a two-gap pattern after a
rising price trend. The gaps must
have some prices in common to set
off the island.
How far will prices decline? Find
the predicted decline by first subtracting
the lowest low from the highest
high in the pattern. That gives the
pattern’s height. Next, subtract the
height from the lowest low to get the
price target. In the 245 patterns I
looked at, the decline averaged 21%,
about par for all bearish chart pattern
types, and they met or exceeded the
price target 78% of the time.