Chapter 23 · Chart Patterns
Reversal and continuation patterns
Formations that suggest a trend is ending, and formations that suggest it is pausing.
Chart patterns need volume to mean anything, and NEPSE turnover is concentrated in a handful of shares. On a thinly traded Nepali stock a textbook pattern can form on a few dozen trades, which is not the collective behaviour the pattern is supposed to represent.
Head and shoulders
Reversal patterns suggest the prevailing trend is finishing. Continuation patterns suggest it is resting. Telling them apart is most of the skill.
| Pattern | Type | What it encodes |
|---|---|---|
| Head and shoulders | Reversal | One last push that fails, then a lower high |
| Inverse head and shoulders | Reversal | The same at a bottom |
| Double / triple top | Reversal | A level rejected repeatedly |
| Double / triple bottom | Reversal | A level defended repeatedly |
| Ascending triangle | Continuation | Flat resistance, rising lows — buyers pressing |
| Descending triangle | Continuation | Flat support, falling highs — sellers pressing |
| Symmetrical triangle | Either | Range narrowing; direction unresolved |
| Flag / pennant | Continuation | A brief pause inside a strong move |
| Rectangle | Either | A clean range between two levels |
| Cup and handle | Continuation | A rounded base then a shallow pullback |
| Wedge | Reversal | Both boundaries sloping the same way |
| Broadening formation | Unstable | Widening range — rising disagreement |
Double top
Measuring a target
The conventional method: measure the height of the pattern and project it from the breakout. A head and shoulders with the head at Rs 620 and neckline at Rs 540 has height Rs 80, giving a projected target of 540 − 80 = Rs 460.
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