Well, hello everyone. Welcome to Getting Started with Technical Analysis. This is our third and final week of talking about price patterns. And today we're going to talk about rectangle or consolidating patterns, and we're going to talk trend reversal patterns. So think head and shoulders patterns, inverted head and shoulders patterns, cup, and those kinds of things. So we're going to look at how those patterns are created and how you can use those patterns to determine potential entries, exits, targets, all that kind of good stuff that we as technicians honing our skills want to learn more about. My name is Barbara Armstrong. I'm a coach with Charles Schwab. If you are not following me in the land of X, formerly known as Twitter, I invite you to do so. My handle is @barbaraarmstrongcs.
We also have the privilege of having the fabulous Mr. Ben Watson with us in the chat today, and you'll definitely want to follow him as well at @benwatsoncs. So, without further ado, let me get something. There we go. I'm just tidying up here. Just before we get into the meat of our presentation, just a reminder that we're going to talk about a lot of stuff today, but it's all for general information purposes only. None of it to be construed as a recommendation or endorsement of any. particular security or chart pattern or investment strategy. Also, if we do look at an options trade, know that options carry a high level of risk and aren't suitable for all investors. We're going to use the paperMoney software application on the thinkorswim desktop platform.
Say that three times fast! But it's just a great place. It mimics your live account. There are some nuances and some differences; it's a great place to practice and hone your strategies. Make sure you're familiar with the platform before you consider trading in your live account. We have designed this series to be taught in a nine-week rotation. And sometimes. we'll throw an extra week or two in there. I've added a week on our friend Mr. Fibonacci, and I think I'm going to add a week on creating a trading plan based on a technical analysis indicators. But this is our core, and we're at lesson seven. So, channels and reversal patterns. I also want to thank Ben Watson because Ben ran with this class really through weeks one through six and did a fantastic job while I was off working on the Barb 2.
0 project, which involved bringing in a new knee to the fold. And it's doing just fabulously. So I appreciate Ben for that. So we're going to look at what these price patterns are. We're going to look at several examples of these types of both just technically on a PowerPoint and then we're going to look at them on the charts, which is really, I think, where it all comes to life. Because if you can't see it on an actual chart, then we're kind of snookered, aren't we? So we're going to spend a bunch of time on that. Yeah. So, you know, price patterns occur because you have different support lines, horizontal support lines, sometimes diagonal support lines and resistance lines that create common shapes. And in the last couple of, we have talked about triangles.
We have talked about wedges. You know, we've talked about you. know some might prefer to call it a pennant pattern, where we're seeing a series of sometimes higher highs and, or sorry, lower highs and higher lows that you know create a pennant type or flag. It almost looks like a flag, doesn't it? But we call it a triangle or a pennant pattern. It can be, you know, similar highs and higher lows. Or it can be the other way around. You know, so we talked about that in previous weeks, but today we're talking about rectangles, which I think of as kind of going a whole lot of nowhere. So something kind of trading within a. Now, if it's trading within a range, it can also, you know, it could be just going like this but It could be creating, you know, a double top pattern or double bottom pattern.
And we'll look at those as well. But, you know, all of these have kind of a unique construction. They can occur over a number of different timeframes, and they all provide us with clues or signals or guidelines for not only establishing a price target, but an entry as well. Okay. And, you know, like I said, with timeframes, they can be in a 10-year timeframe; they can be in a, you know, three-month timeframe; they can be in any timeframe. It can be intermediate, it can be short-term, it can be long-term. Okay. And we can use these patterns sometimes to generate, you know, targets. where a stock may be breaking out and it's never been this high before. So then, how do you determine a... We, you know, sometimes we might say, and we're gonna look at an example here of a swing target today where we might say, well, I just like to trade it up to the previous high, given that it's broken out of a pattern or bounced off a You know, it's a way for us to help identify reversals and targets, you know? Target, they are important, right?
So here's our first one, you know, a rectangle where you know, and what characterizes a sideways pattern. And you know, we talked about Dollar Tree. Actually, I could bring up that because for about, I don't know six or eight months, Dollar Tree was it went a whole lot of nowhere. Now the difference between this example and the Dollar Tree example is that it had, whoops, it had had a great fall. And then it ended up being a trend reversal pattern. And so sometimes, you know, with a rectangle or a channel or a sideways pattern, you know, in the event of Dollar Tree, it had come down last September and then it kind of went a whole lot of nowhere for months.
And then it didn't, you know, break out to the downside, which would have made it a trend continuation pattern, ended up breaking out to the upside and became a reversal pattern. And how do we know how these things are going to play out. We don't, that's the We don't know how they're gonna play out until they, in fact, either break above a resistance level or break below a support level. So these can end up being bullish or bearish. And, you know, they can happen during an uptrend, and then all of a sudden we see a, you know, as we've been seeing in AMD lately or, you know, we can have a downtrend and then it seems to find a bottom and the sellers kind of get exhausted and the buyers keep coming in, but they go back and forth sometimes for many months, okay?
And with a trend continuation, we see a strong trend. And, you know, when you've just come. up like crazy, and you've had a really strong uptrend. It's not uncommon to see a stock kind of catch its breath and go sideways for a And then, when would we consider an entry? Well, when it either breaks to the upside, as it did in this example, so a break of resistance, breaking out above the or a break of support, you know, depending on the trend. And if it was downtrending and then it broke to the downside, we'd call that a trend continuation pattern. You know, if it broke to the upside, it could be a reversal pattern. And so, you know, if we're looking for a how might we determine a target?
Well, if we say, okay, the width of this is about 10 from top. To so if that's about 10 and it breaks to the upside, then we'd be looking for about a 10 move to the upside. Now, is it a guarantee that it's gonna move up 10? I wish. There are no guarantees, but sometimes it works out so spookily almost spot on, it's crazy. And then sometimes it gets kind of close. And then sometimes, as we saw with Walmart recently, you know, it's yeah, total fake-out. OK, but this is our target. We're taking the height of the pattern and we're going to add it either to the place where it broke out to the upside, the resistance line, or if it breaks out to the downside, to the support line. And we'll look at examples of each.
Now this is an example of a pattern where we ended up with a trend reversal And they call this a double top Now why a double top Well because we had a really significant uptrend happening Just changing my color So we had this significant uptrend happening and then it came up and hit a came back down and hit a similar high And so we call this a double top And it could just be creating a range or a and then it could break to the upside But if it breaks to the downside then that's a trend reversal And it's not uncommon for something to break and then come back And what we saw here was a retest And sometimes you're saying hey I'm not sure if this is actually a breakout or a breakdown or a fake down. And so if you wait for that bounce, if on the day we had this red candle you put in a conditional order, you would have been in at the beginning of the next day.
So, and here our entry if we're thinking this is a trend reversal pattern would be that break of support. We've already looked at the target, and we're looking here at equal highs. And a double top is definitely bearish if it breaks to the downside. Right now, right now there aren't as many of those on the. So Ambrose is asking what's the difference between a double top and a V shape? Well, you have a V shape within the double top but we're looking for these specific patterns. And when things are moving bearishly, things will sometimes sell off. We can see we had this big sell-off, and we saw that with Dollar Tree, and I'll bring this one up as an. And it came down, and then it came down again. So similar lows.
It's like, oh, could the sellers be getting exhausted? Like everybody who wants to ditch this stock maybe they've sold it, and then it rallies a little bit, and they think, okay, it's rallied, I'm going to. And so they sell, and then it rallies a people sell again. Now, in this case, it went down twice, and that's why we call this a double bottom. If it came down three times, we call it a triple bottom. Now you could call that a triple V pattern, but I didn't get to name these. Nobody asked me what to name them, Ambrose. So you could call that a double V. In French, it would be V and double V. Yeah, and then when it broke out, what would our target be? Is this range to the upside?
Now it looks like it ended up moving up more than that 10, but if you put in a 10 target and got out, are you going to beat yourself up? No, you hit your target. It was a successful trade. So peace, love, move on to the next one. Okay, and again here we're looking for that equal lows forming a support level. Oh, let me just erase the Etch. Now before we go to the I just wanna quickly draw a couple of other. Ben is making me. I've been talking to a lot of Canadians yesterday, or in the last month. I can feel my accent coming back as we speak. But if you remember, we had a double top. Well, what if you have a high and then a higher high?
That just looks like a turn continuation, right? But then what happens if you end up with a lower high? Well, that to me looks like a bit of a We are heading for the fall season and all things ghoulish. They call that a head and shoulders pattern. And if it breaks to the downside— and sometimes it will break to the downside— then we're gonna measure this distance. And if this is 20, we'd look for a move 20 to the downside. And sometimes it doesn't go straight down; it'll go down like we saw, and it'll come back up and retest, and then move. But this is a bearish pattern. Now, on the flip side, we have something that's coming down, starts to rally, falls again. You're going, well, that's just, you know, a bear flag.
Yeah. And then it comes up, and then it doesn't go down quite as far. So we look at that. It's kind of like somebody is looking in a reflecting pool, right? This guy here, we call that an inverted head. And, again, we're gonna measure the distance the same way. Now, what if there's just a whole bunch of, like, mishy-mashy stuff? happening, and then it goes down and comes up, and then it comes down partway but not all the way, going ooh, maybe this downtrend is over. And then, you know, we've got this potential resistance line here, and then it breaks out. What do we call that? We call that a cup and handle. And again, you know, you could call that big V, little V, an upside down ghost, yeah.
And I find that drawing the, like, it just makes it look more real. Oh, I haven't looked. You know, Wiley, thank you for reminding me, because I was going to ask you guys if you saw some of these patterns on the to go ahead and type in the ticker symbol, and we can look at them together. Now, I have a whole page full of things that I want to look at. So now let's go out to the. And I hope everybody is not mid-beverage because I want you guys to participate. OK? So as we look at these, we're playing an I spy with my little eye. And I want you to tell me what you see. OK? So are we ready? OK. So first one, let me bring this up. OK. So well, we could start with. So what do we see when we look at Cisco?
Well, I see that I have to change the color of my drawing tool, saw this cup and handle, and then like a little mini handle. What were we waiting for here with this cup and handle pattern, which is a consolidating pattern? We were waiting for this breakout. And it looks like Prior to my going away, we placed a trade when it broke out. But it broke out and then it came back to retest, kind of, sort of. And then it came back and it retested again. And then it retested again about a week ago, and it's now moving to the upside. If we said, well, it seems to be having trouble really taking off, but we've had a number of up days here.
If we looked at this originally, what might our target have been when it first broke out? And let me just use my drawing tool to help with the So let's say around this 52. 79-ish level. Sorry, I didn't need two lines. And it broke out at this 66 level. So that's about a 13-14 move. So if I take 66. 22 and I subtract. 52 79 about 13 43 is our range here. So if I said, well, then if I add say 13 to this, that would be 79. Could be a But maybe I want to be more conservative. So maybe I look at this and I say, I wouldn't mind owning Cisco. It's in the tech sector, which if I come and look at, and you may want to come and look at our analysts raising price targets or dropping them, what's kind of going on in the news.
So, Citi Securities increased their target to 75. Argus raised their price target to 80. So it looks like the analysts are somewhat bullish, or at least the two that we just saw there. The other thing that's kind of interesting is that when we look at the sector. indices and we look at which ones have been strong in the last four weeks. We've got, well, we've got technology here in the middle of the pack. Communications, consumer discretionary, and materials are at the but over the last three months, technology leading the pack as being the strongest sector. So if we looked at this, could we say, well, this is kind of a continuation of this? We've seen some consolidation, but could we buy a hundred shares of stock and just put in a swing target instead of the target based on this?
And we could do that. And where might we put a stop? Well, we might say, well, let's look at the recent lows. And we had a low here. of 65 75 So let's go 3 below that times 0 97 at 63 77 And so if we wanted to put that in that would be Cisco 63 77 And then our swing target could be 72 55 or we might make it just 72 It doesn't have to go all the way It's currently sitting at 68 So that would be a 4 gain on a 68 stock You might say well that's not much but if you take four divided by 68 that's a 5 88 return for how long might we be in this trade Who knows Now we could end up losing So we're going to put a stop in place It doesn't guarantee that we'll get out at exactly that price How long might it take It might never get there and it might get there in two weeks
So who knows It went from here to there in like four or five days, one two three four days. So, okay. So, we're going to come to our trade tab. We're going to right-click. We are going to buy custom with an OCO bracket. And this is a half-million-dollar account; we could have a 25, 000 position. So, we could buy 300 shares, four sixes or 24. We could almost buy 400 shares, but we're going to buy 300 shares. Going to click that. So, 300 shares, we're going to make our price target here 75, and our exit 63 77.
I always like to do at least, I may have to go in and change these later. It's not letting me open them, and I'm not quite sure why. But we want to make our exits good till canceled. And I can show you how to change that. I've got something glitchy happening with my system. Of course, they have McDonald's. The first one in my hometown opened when I was 16. I went and applied for a job there; I didn't get it, but I got a job at a restaurant the next day where I made way more money. OK, so that was Cisco. Now I want to look at a bunch of. So let's look at. So here's one where we had a really significant uptrend. It pulled back, started to, and then what do we see here?
It really ended up range bound, right? Trading between about 100 and 94 in this 6 range. And then it broke out and it pulled back. And if we had placed a trade on this day, so it broke out. pulled back was moving to the upside. Would that have been considered a reasonable entry? It would have. Absolutely! But would it have worked out? As it turned out, no, it wouldn't, because now it's back in this range again. So it turned out this breakout turned out to be more of a fake out, and it looks like they missed a bit on earnings. So now the question is: will this support level continue to hold? So sometimes we have these breakouts, and they don't quite work. You know, so there is no plan that is infallible.
Let's look at one that did work. So here's a firm. Now here's one where we did place a trade on this; I just haven't got rid of all my lines. But I left this one on, and we'll shake the Etch a Sketch after we go through this example together because I think it kind of suits our purposes in that if we're playing I spy. I saw back here our inverted head and shoulders, right? And then it broke out to the upside, and it came back and it did a retest here. And so we entered the trade here and we said, OK, we went from about 32. 60 to 56. 56. So we had a range on this of about 23. 92, call it 24 approximately. That was our range.
And so based on that range, we probably knocked about 1 off it. And we said, OK, our target because we took 56. 56 and we added that 24 to it, which would have given us like 80. 50. And so we knocked 1 off. We made our target 79. 50, and it came up and hit it like once, twice, three times. And now, so that's one where the stock did move as high as this pattern indicated it might. And now, what's setting up on the chart? Well, it could be a double top, and it could be a double bottom, right? So let's get rid of now all these lines. Let me just come down here.
So now we see consolidation happening again around the 80-ish mark. And I tend to nip off the wicks in 71. But it hasn't broken out either to the upside or to the downside yet. So it could be a double top and about to break down. Or I guess if it comes down and then breaks down, it would be a triple. top Do you see what I'm
One two could it be or if it breaks through here could it be a double bottom? The answer is it could be either one, but we don't know what it is yet. Excuse me, let me have a drink. Okay, let's look at another one. So Charles is asking, would this be a candidate for an iron condor? And when I look at this, I would say nay nay to quote John Panette. And why would I say nay nay? Because it's only been consolidating here the last couple of— it has been in a pretty decided uptrend since the beginning of. And so you could sell a short put vertical when it's bouncing off support or do something else that might be a long call vertical.
or buy the stock but to sell a short call vertical, which is the top of the credit spread sandwich that makes up an iron condor. Hmm, you know the market has been overall bullish, this sector has been bullish, this stock has been very bullish. I don't know if I'd wanna take that trade for that reason, but I like the way you're thinking. I like the So here we have PepsiCo. What do you guys see when you look at this? You know, I see a cup and a big, like maybe one of those like big latte bowls, big big cup handle broke out, coming back to retest. But do we have a bounce yet? We do not. And so, you know, would we place the trade today?
Well, you might say, well, you know it came, it had support and resistance here; it's coming again. I think we should go for it. This candle pattern would not say go for it; it would say wait for confirmation. And so, if you're being more conservative, and we might look at this in tomorrow's class, trading price patterns, you might say I'm just going to be patient and wait because I don't want to see. Andre and Vic, you guys have it? Yes, and this could be a setup for a short vertical trade. So, you know, Jay is saying we should wait for a close above the high of the low day. I like the way you're, Wiley, is saying like hey, you know, and he's not saying I'm planning on golfing tomorrow.
What if you're planning on golfing tomorrow and you don't want to miss the, you know, place a conditional order? Yeah, we could do that too. OK, somebody wants to look at It wasn't on my list, but I try and run a semi-democratic class here. OK, so here's the goo. And let's back it up. OK, so let's extend this. Extend to the, we have this big kind of bowl or V pattern here. It's really not an inverted head, and although if we put a line down here, we'd have to come out to a two-year chart almost. Yeah, I'd say this is, you could say this is a really big. And then here we'd have to almost move this up.
So it's just kind of flirting with this pattern here. But we don't. have a breakout really yet. It's kind of flirting with it. Now today, I just recorded a short video, and it'll be posted within a couple of This is a Harami pattern, where today's candle is totally inside the body of yesterday's. And at a ceiling or resistance level, this is considered to be a bearish configuration. So based on this, if the market closes with this pattern intact, the expectation is that we would see Google pull back tomorrow. So we may want to just exercise some patience on this. OK, let's look at Cisco. Did we already look at Cisco? We did. So let's look at CCL. So with CCL, so this is Carnival Cruise Lines. Now what have we seen happening lately.
It's come up and hit once, twice, came up into the neighborhood a third time. It's been kind of consolidating, hasn't it, after this nice run to the upside? And here, when we got to April 8th, which was a low point in the market for many stocks, we saw for a while like all the cool kids seemed to be doing these either cup and handle or inverted head and And when this broke out, it went from 15 to 23. That's an 8 move. How much of a move did this make? Well, it went from 23 to 31, almost 32. So that's almost an 8 move. Now, if you bought a call, what's the advantage of buying a call? Well, if you bought a call back here, let's say when it broke.
out it took a while to actually make it all the way to the target, and calls are less expensive. So they have the advantage of being less expensive, but there's a limited timeframe associated with them. And there's what they call time decay, where if you buy the stock, you can just afford to let it sit in your account if need be. It may not be crushing it on a day-to-day return, but you've got time on your side. And so could we look at this and say, hey, this is breaking out. This is a 3 pattern from 28 to 31. Could I put in a target here of 34? You might say 34, that's only you're only making like 2 and 23 cents, but it's a 31 stock.
So if you said okay, if I could make say 2 and 20 cents a 31 investment well what is it 31 80 a 7 return That's not too shabby right So and we could do that by buying the stock And you know so here's our range of say 3 And if we go here from 31 to 30 put in a target of 34 if we bought the stock how many shares could we buy Oh we could buy 25 000 worth And if I divide that by let's just call it 32 we could buy almost 800 shares So let's say we buy 700 shares And where would we put our stop Well we might say hey if it goes back like below this 31 by more than 3 it's not going in the right direction So if I took 31 times 0.
97 so that would come to 30. 07 And sometimes these big numbers like 30 is a big round number, so maybe we make our stop 29. 89. And our target, maybe we make it 33. 90 instead of 34, right? I mean, you can do it however you like. But if you know, and then how much are we risking if our stop is at 29. 89? Well, we're risking about 2 a share, so you know we're we could lose, if we did 700 shares, we could lose $1,400. Now, putting a stop loss in doesn't guarantee us that we'll get out at an exact price, does it? You know, but it gives us something, you know. And this stock is very heavily traded, you know, over 10 million shares traded so far today.
We're going to put in our target. Let's just make it 34 even. And then, is this a set it and forget it No like we had a trade with an example trade with Apple earlier this year where we it came within 15 cents of our target. And so we just exited. And this was going to be 29. 89, 29. 89. And again, for some weird reason, it's not letting me change these. So our position size 22,232. So, and it's not letting me put this in my category either. Okay, so now that we have that in there, let me just see if I can come in and look at these working orders. See, this is a day order. So let's see if I can cancel and replace.
Now I can make it good till canceled. It may not let me put it in there. Rejected, so I have to do the whole. I saw that after I put it in. So cancel I'll fix this afterwards I probably have to cancel and replace the put these in again. Otherwise they'll expire at the end of the day, and we don't want that. Okay, so we've got our order on CCL and then we had another order 67 97 for Cisco, now trading at 68 13. So we'll give them their extra cash and go ahead and just put that one in. There we go. Okay, so let's look at a couple of extra charts and then we'll wrap things up. So if we look at a lot of people look at. So how about we look at,
and we'll come in a little closer. So this has been on the struggle bus this year, right? Like it has been. It's down 9, and it's in a sector that has been leading the pack for. the last three months, but it came down and then started to rally, and it's been kind of in this range between around 194 and 215. Then it recently broke out on the 7th, and then it's continued to move to the upside, pulled back, so some would call that a bull flag. We now have a close above the high of the low day. In fact, we had that the day after this low was established. And so if we were looking for a target for this, what might it be?
We might say, well, this moved about 20, so we might look for a target around 236, which is pretty close to where it came up to. It came up to 235. 12. So here's an example of we had a range, and it came up to within a hair's. breadth of it. And so, if we looked at this, could we do a swing trade? We could. So, guys, I now have to wrap. Somebody's asking if we can look at Qualcomm. When I look at Qualcomm, I see a couple of things. One, it seems to me we've got kind of a ceiling, kind of in this area. I activate this kind of around here, and it hasn't broken above that yet. But could it be setting up?
You know, and this is not one we're gonna put in a. Could this be creating a bit of a, not a sloppy Joe, but kind of a weird looking inverted head and shoulders or cup and handle type pattern? The thing is, it hasn't broken out yet. We've got no breakout, you know, and it's come up and hit this 163. 164 level a couple of times. And so you know, this is where some traders might say, you know, namaste, I'm gonna be zen, I'm going to wait. And you know, others might say, what you looking so far out for? I'm gonna do, I'm gonna buy a long call and you know I see a bull flag here, and I'm going for it. And you know, if this moves about 3 and 50 cents in an average day, it's at 159.
That gets me up close to here. I'll be out when it hits its head on the ceiling. All the more power to you. I'm not telling you it's wrong now because some might look at this and say, well, I just do really short-term trades. And this is where the art of technical analysis comes in. And So I'm looking at this and I'm seeing a diagonal resistance breakout. And that's the difference between looking at the really immediate term and a little longer term. And there's no one right answer. You know, so if you said, well, I'm going to do a one ATR, like this is an ATR, this is about, this is how much Qualcomm has moved in an average day over the last 14 days: about 3 and 40 cents.
So, so we've got to wrap up. I wanna thank you for being with me. I hope this has given you some confidence in looking at charts and being able to these ranges, breakouts, how to calculate a target on them. We did a couple of example trades. Here's my ask as we. wrap up If you aren't following Ben and me in the land of X, Ben Watson, CS, and Barbara Armstrong, CS, would love to have you follow us. Please hit the like button; it helps move this webcast up in the YouTube algorithm so that more people will find it. And I don't know about you, but I think that would be a value. So it's a way of doing a potentially a favor for a random stranger without even leaving your house.
And then, if you haven't subscribed to the channel, you'll want to click on that subscribe button. It's free to join us, and it's where we keep all our archives. So I thank you. I thank Ben for being with us in the chat. Do we have a survey? I think. We are survey free today, so you are off the hook for that. So again, thanks for joining us. Stay tuned for the next lineup. We're not done our webcast day yet. If you'd like to join me tomorrow for trading price patterns, I would love to see you there. That's at one o'clock Eastern. So get out there and hug someone you love today. Enjoy the rest of your day, and thanks for joining me. Bye for now.
