Triangles, cups offer clues to market trends

Repeated chart patterns are evidence of the behavioral impact on market activity. The patterns reflect the way people think individually and this behavior is repeated thousands of times when individuals buy or sell stocks. It is human behavior that creates chart price patterns and which makes the patterns so useful as an analysis tool.

Chart patterns do not suddenly appear. They develop over time. They are easy to identify retrospectively on a historical chart, but more difficult to assess as they are developing. There are usually one or two key points that appear to suddenly reveal the chart pattern.

Market analysis using chart patterns is complicated when two patterns develop in a similar time period. Analysts must decide which pattern is more dominant and influential. The Shanghai Index has two long-term patterns. The first pattern identified was the cup and handle. This pattern is best seen on the weekly chart of the Shanghai Index. The handle in this pattern dropped below 50 percent of the height of the cup. This significantly reduced the reliability of the cup pattern. The probability of a successful breakout was reduced. If a breakout did develop, the probability of reaching the pattern target projection level was also reduced.