Learning Technical Analysis #3 | Bearish Patterns

By costanza | Costanza Technical Analysis | 9 May 2020

I set myself a goal to properly learn Technical Analysis in 30 days instead of only watching Youtube TA videos for entertainment. As a way to improve my own learning process, I will be making a series of posts in bite-sized pieces on everything that I learned.

The terms Bears and Bulls in the stock market come from how these animals attack their prey. Bears will tear those down to the ground with their claws and teeth while Bulls will lift them up with their horns.

#3 Bearish Chart Patterns

These are patterns that indicate a higher probability of the price going down. These are the 3 bearish patterns that are most common.

Head & Shoulders
Double Top
Descending Triangle

1 Head & Shoulders

This is one of the more reliable bearish patterns. The timeframe one of these patterns is on makes a difference. When it forms on the 1-hour chart it often goes down for a little while before going back up. When it has formed on the 1-day chart, it clearly indicates a top and it's unlikely to go higher anytime soon. The pattern itself consists of 3 peaks with the middle one being the highest. It basically makes the price switch from going from higher highs to higher lows to signaling lower highs and lower lows.

This pattern consists of:
Left Shoulder = First Peak
Head = 2nd Peak
Right Shoulder = 3rd Peak
Neckline = Connection line between bottoms in between the 3 peaks. The moment this breaks after the 3rd peak, the Head & Shoulders pattern is complete and a move down is very likely.

Some clear examples:

The Head & Shoulders pattern is not always obvious and a couple of rules apply.

The right Shoulder is often a bit lower compared to the left shoulder but this doesn't have to be the case.
The neckline doesn't have to be horizontal and can have an angle
The time between both heads and shoulders doesn't have to be similar, one of the shoulders can take a much longer time to form.

There is a tool in Tradingview that allows you to clearly draw the head & Shoulders Pattern.

2 Double Top

The double top patters consist of 2 rather sharp tops making an M-shape signaling a top and reversal. The 2nd peak is slightly lower compared to the first peak. You want to see enough time between both tops and these patterns mostly work on a longer time scale. The Bitcoin daily chart shows 2 clear Double Tops which indicated to top of the 2017 Bull market along with the 2019 Top.

The psychology behind the double top is that the market starts to rally again after making a top seeing a lot of extra sellers come in who missed the previous top or people that bought the previous top to see it quickly go down now being at a point where they are almost break-even which allows them to get out.

3 Descending Triangle

The descending triangle is a bearish pattern with a horizontal support line and a resistance line that systematically goes down. This means each time buyers at higher prices dry up pushing down the price. The moment all buyers are gone it will hit the horizontal support line and the ones selling need to go lower to get their order processed making this pattern break down. These patterns seem to be more common on a shorter timeframe.

Example: