Introduction to the Art and Science of Technical Analysis
In this example, we see two chart patterns indicating potentially contradic-
tory signals. The ascending triangle is regarded as a bullish indication, while
the complex head and shoulders formation is potentially bearish. Therefore,
as price starts to contract, forming a symmetrical triangle, an analyst may be
somewhat perplexed at the conflicting signals, being unable to provide or is-
sue a clear forecast as to whether the market is indeed potentially bullish or
bearish.
One way to resolve this apparent conflict is to first identify the size of each
pattern. The sentiment associated with larger patterns or formations will take
precedence over that of smaller formations. These larger formations are more
representative of the longer‐term sentiment whereas the smaller formations
are more indicative of short‐term sentiment. Hence in our example, the bull-
ish sentiment associated with the ascending triangle takes precedence over the
bearish sentiment associated with the complex head and shoulders formation.
Therefore, until price breaches the complex head and shoulders neckline, the
entire formation may be regarded as a potentially bullish pattern. Following this
simple rule helps reduce some of the subjectivity involved in reading price and
chart formations.
Figure 1.18 depicts an idealized scenario where all the chart formations are
potentially bearish. There is no conflict in sentiment between these formations
as they are all in perfect agreement. The smaller formations act as additional
evidence and add to the overall bearish sentiment. There is also a lesser amount
of subjectivity involved when reading the sentiment associated with formations
that are in perfect agreement. Nevertheless, it should be noted that although
such formations may appear somewhat more straightforward with respect tofIgure 1.18 Chart Pattern with Complementary Signals.