Trader Resources : Reading Bar Charts
Chart Indicators

The Head-and-Shoulders formation is a key indicator of market reversals. The formation consists of two shoulders, a head, and a neck line. A complete head and shoulders indicates that a market is in decline. The expected market move after penetration is the distance from the head to the neckline. The Inverted Head-and-Shoulders indicates a market that is about to rebound. An example of a head and shoulders can be seen in the figure below.


Head-and-Shoulders Example

Double Tops have two peak points with a valley in between. They can often indicate major market moves. The double top indicates a reversal to a market decline. When the decline from the second top penetrates the valley, the expected market move is the distance from the double top to the bottom of the valley. The inverse, a Double Bottom, indicates a market rebound. A double top is shown in the figure below.


Double Top Example

Rounded Tops and Rounded Bottoms are usually good indicators of future price movements. The size of the top can be a good estimation of how large the following price fluctuation will be. An example of a rounded top can be seen in the figure below.


Rounded Top Example

Gaps occur when a contract does not trade in a price range. There are four types gaps. The first is the Common Gap. The common gap can occur at any time, and does not have any particular significance. This type of gap will often be filled in later. The Breakaway Gap occurs when the trading prices for a contract are outside the previous trading ranges for the contract, leaving a price area in the chart where no trading took place. This type of gap can often signal a dynamic move in the market. A Runaway Gap signals the acceleration of an already occuring trend. This type of gap is usually a sign of a strong bull or bear market. The Exhaustion Gap signals the end of a trend, and occurs after a relatively stable period of trading. The figure below shows examples of each type of gap.


Gap Examples

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