Chart Analysis - Common Chart Patterns - Reversal

  Common Reversal Chart Patterns

1. Double Top Reversal (Bearish Reversal)
2. Double Bottom Reversal (Bullish Reversal)
3. Head and Shoulders Top (Bearish Reversal)
4. Head and Shoulders Bottom (Bullish Reversal)
5. Falling Wedge (Bullish Reversal)
6. Rising Wedge (Bearish Reversal)
7. Rounding Bottom (Long Term Bullish Reversal)
8. Triple Top Reversal (Bearish Reversal)
9. Triple Bottom Reversal (Bullish Reversal)
10. Bump and Run Reversal (Bearish Reversal)

• Double Top Reversal (Bearish Reversal)

What is Double Top Pattern?

A double top is a trend reversal chart pattern formed after good bullish price move (a continuous price move for a good duration) where the upward price movement loses its steam (first top) and it retraces a bit (to neckline or midpoint). Then again it moves in direction of original trend and reaches the first top-level thereby forming the second top. It again cannot move above the first top and start moving to the neckline. Once the neckline is broken its fall in price is steep.
Understanding Double top in details A double top is formed when the stock moves up for many days and the movement is steep towards the end. And then it falls from there by about 10-15 %. After this, it again tries to move up and reaches the level of previous high but cannot cross its previous high. After this, it again starts falling to a level of the neckline. Once it retraces below neckline a downtrend starts.

Please note that in actual practice, the two top may not be exactly at the same level. Generally, the second top is a slightly lower level but 1-2 % higher then the first level is also acceptable. A significant higher second top may be dealt with a lot of suspicions as it may indicate a continuation of the uptrend

Volume in double Top has a lot of significance as it can help to confirm the formation of the pattern. Volume during first top should generally be much higher than volume during second top formation and volume during midpoint formation should be much lower than volume during neckline break out. Please avoid aggressive positioning when the volume is not supporting the move. For aggressive traders, a strict stop loss is recommended.

It is very fairly common to see a pullback near to neckline after formation of the pattern. It should generally be seen as a healthy thing as it gives better confirmation of neckline as resistance. In some case, the pullback may happen few times. If this happens too many times then it may not be a typical double top pattern. In case of pullback, it is recommended to keep a stop loss of about 3% above neckline.

Volume in double Top has a lot of significance as it can help to confirm the formation of the pattern. Volume during first top should generally be much higher than volume during second top formation and volume during midpoint formation should be much lower than volume during neckline break out. Please avoid aggressive positioning when the volume is not supporting the move. For aggressive traders, a strict stop loss is recommended.

It is very fairly common to see a pullback near to neckline after formation of the pattern. It should generally be seen as a healthy thing as it gives better confirmation of neckline as resistance. In some case, the pullback may happen few times. If this happens too many times then it may not be a typical double top pattern. In case of pullback, it is recommended to keep a stop loss of about 3% above neckline.

• Double Bottom Reversal (Bullish Reversal)

What is Double Bottom Pattern?

Double Bottom is a bullish trend reversal chart pattern formed after good bearish price move (a continuous price down for a good duration) where the downward price movement looses its steam (first bottom) and it retraces a bit (to neck line or mid point).

Then again it moves in direction of original trend and reaches the first bottom level there by forming second bottom. It again cannot move down first bottom and start moving to neckline. Once the neck line is broken uptrend is seen.
Understanding Double Bottom in details Double bottom is formed when the stock moves down for many days and the movement is steep towards the end. And then it goes up from there by about 10-15% . After this it again tries to move down and reaches level of previous low but cannot cross its previous low. After this it again starts going up to a level of neckline. Once it retraces above neckline a uptrend starts.

Please note that in actual practice, the two bottom may not be exactly at same level. Generally, second bottom is a slightly higher level but 1-2 % lower then first level is also acceptable. A significant lower second bottom may be dealt with lot of suspicion as it may indicate continuation of downtrend. Shape of the bottoms can be from sharp and pointed to rounds one.

Volume in double bottom has a lot of significance as it can help to confirm formation of the pattern. Volume during first bottom should generally be much higher than volume during second bottom formation and volume during midpoint formation should be much lower than volume during neckline break out. Please avoid aggressive positioning when volume is not supporting the move. For aggressive traders a strict stop loss is recommended.

It is very fairly common to see a pull-up near to neck line after formation of the pattern. It should generally be seen as a healthy thing as it gives better confirmation of neckline as resistance. In some case the pull up may happen few times. If this happens too many times then it may not be typical double bottom pattern. In case of pull-up, it is recommended to keep a stop loss of about 3% below neck line.

Double bottom formation generally happens when knowledgeable investor sense value in stock and start selling thus resulting in slow and steady decrease in price with gradual down in price. Seeing the trend many more people jump in to make quick bucks by short selling. This leads to lower jump in price. Once this is known to lot of uninformed people, they jump in and moves the price to a very low level (bottom 1).

But this price is unsustainable and smart investors starts booking profit resulting in increase in price to a level of midpoint. To lot of uninformed people who missed the boat during first rally, jump in considering it 'sell' opportunity and results is decrease in the price to previous low but this time volume is less. As the lower point is unsustainable, the price hike to neckline where it may get some resistance. Once the neckline is broken with good volume a typical trend reversal starts to reach a fair value but the upward momentum can take it to upper fair price range and thereby making a classic double bottom pattern.

• Head and Shoulder Top ( Bearish Reversal)

Head and Shoulder pattern is a very reliable pattern and that is reason of its popularity. It is a reversal pattern and is formed after an uptrend.

Head and Shoulder pattern consist of the following:

1. Left Shoulder: In continuation of the uptrend the price goes up to forms a new high or first peak known as left shoulder and then make a low.

2. Head: Continuing the left shoulder low, again the price goes up to a new high, higher than the left shoulder forming a middle peak called as head of the pattern and come down.

3. Right Shoulder: It is formed when the price goes up again from the low of the head but not as high as the Head and comes down forming third peak or right shoulder.

4. Neckline: It is the line drawn through the bottom of the the Left Shoulder, Head and the Right Shoulder and serves as an important support for this pattern.

Breakout: The pattern is only considered reliable and complete when the price goes down and closes below the neckline and there is often increase in Volume.

Shape: Theoretically Head and Shoulder pattern should be symmetrical. It means that the left and right shoulders should form peak about the same price level and are equally distanced from the Head. But practically you rarely seen such symmetrical Head and Shoulder patterns in real time. However sometimes the left shoulder is higher then the right shoulder or vice verse. But the head always have the highest peak. It is not necessary also that the peaks formed in this pattern to be sharp, it may be pointed to round shape. And therefore it is not necessary that neckline should be horizontal, it can be sloping upwards or downwards.

Volume: With the formation of Head and Shoulder there is continuous decrease in the volume. That means volume will be higher in the left shoulder and eventually it decreases with the formation of head and right shoulder.

Breakout Range: This is the vertical distance from the tip of the head till the neckline. It is usually used to set the rough

potential price target however other technical indicators must also be considered here as well.

• Head & Shoulder Bottom (Bullish Reversal)

Reverse Head And Shoulder Pattern is just opposite of Head and Shoulder Pattern. It is also a very reliable pattern and that is reason of its popularity. It is a reversal pattern and is formed after a downtrend. Reverse Head and Shoulder pattern consist of the following:
1.Left Shoulder: In continuation of the downtrend the price goes down further to forms a new low or first peak known as left shoulder and then make a high.
2.Head: Continuing the left shoulder high, again the price goes down to a new low, lower than the left shoulder forming a middle peak called as head of the pattern and goes up to the previous high.
3.Right Shoulder: It is formed when the price goes down again from the high of the head but not as low as the Head and comes up again forming third peak or right shoulder.
4.Neckline: It is the line drawn through the top of the the Left Shoulder, Head and the Right Shoulder and serves as an important support for this pattern.


Breakout: The pattern is only considered reliable and complete when the price goes up and closes above the neckline and there is often increase in Volume.
Shape: Theoretically Head and Shoulder pattern should be symmetrical. It means that the left and right shoulders should form peak about the same price level and are equally distanced from the Head. But practically you rarely saw such symmetrical Head and Shoulder patterns in real time. However sometimes the left shoulder is higher than the right shoulder or vice verse. But the head always have the highest peak. It is not necessary also that the peaks formed in this pattern to be sharp, it may be pointed to round shape. And therefore it is not necessary that neckline should be horizontal, it can be sloping upwards or downwards.
Volume: With the formation of Reverse Head and Shoulder there is continuous decrease in the Volume.That means volume will be higher in the left shoulder and eventually it decreases with the formation of head and right shoulder.
Breakout Range: This is the vertical distance from the tip of the head till the neckline. It is usually used to set the rough potential price target however other technical indicators must also be considered here as well.

• Falling Wedge (Bullish Reversal)

The Falling Wedge is a bullish pattern that begins wide at the top and contracts as prices move lower. This price action forms a cone that slopes down as the reaction highs and reaction lows converge. In contrast to symmetrical triangles, which have no definitive slope and no bias, falling wedges definitely slope down and have a bullish bias. However, this bullish bias cannot be realized until a resistance breakout.
The falling wedge can also fit into the continuation category. As a continuation pattern, the falling wedge will still slope down, but the slope will be against the prevailing uptrend. As a reversal pattern, the falling wedge slopes down and with the prevailing trend. Regardless of the type (reversal or continuation), falling wedges are regarded as bullish patterns.

1. Prior Trend: To qualify as a reversal pattern, there must be a prior trend to reverse. Ideally, the falling wedge will form after an extended downtrend and mark the final low. The pattern usually forms over a 3-6 month period and the preceding downtrend should be at least 3 months old.
   
   
2. Upper Resistance Line: It takes at least two reaction highs to form the upper resistance line, ideally three. Each reaction high should be lower than the previous highs.
   
3. Lower Support Line: At least two reaction lows are required to form the lower support line. Each reaction low should be lower than the previous lows.
   
4. Contraction: The upper resistance line and lower support line converge to form a cone as the pattern matures. The reaction lows still penetrate the previous lows, but this penetration becomes shallower. Shallower lows indicate a decrease in selling pressure and create a lower support line with less negative slope than the upper resistance line.
   
5. Resistance Break: Bullish confirmation of the pattern does not come until the resistance line is broken in convincing fashion. It is sometimes prudent to wait for a break above the previous reaction high for further confirmation. Once resistance is broken, there can sometimes be a correction to test the newfound support level.
   
6. Volume: While volume is not particularly important on rising wedges, it is an essential ingredient to confirm a falling wedge breakout. Without an expansion of volume, the breakout will lack conviction and be vulnerable to failure.
   

As with rising wedges, the falling wedge can be one of the most difficult chart patterns to accurately recognize and trade. When lower highs and lower lows form, as in a falling wedge, a security remains in a downtrend. The falling wedge is designed to spot a decrease in downside momentum and alert technicians to a potential trend reversal. Even though selling pressure may be diminishing, demand does not win out until resistance is broken. As with most patterns, it is important to wait for a breakout and combine other aspects of technical analysis to confirm signals. 

FCX provides a textbook example of a falling wedge at the end of a long downtrend.

• Prior Trend: The downtrend for FCX began in the third quarter of 1997. There was a brief advance in Mar-98, but the downtrend resumed and the stock was trading at new lows by Feb-99.
  
• Upper Resistance Line: The upper resistance line formed with four successively lower peaks.
  
• Lower Support Line: The lower support line formed with four successive lower lows.
  
• Contraction: The upper resistance line and lower support line converged as the pattern matured. Even though each low is lower than the previous low, these lows are only slightly lower. The shallowness of the new lows indicates that demand is stepping almost immediately after a new low is recorded. The supply overhang remains, but slope of the upper resistance line is more negative than the lower support line.
  
  
• Resistance Break: In contrast to the three previous lows, the late February low was flat and consolidated just above 9 for a few weeks. The subsequent breakout in March occurred with a series of strong advances. In addition, there was a positive divergence in the PPO.
  
• Volume: After the large volume decline on 24-Feb (red arrow), upside volume began to increase. Above-average volume continued on advancing days and when the stock broke trend line resistance. Money flows confirmed the strength by surpassing their Nov-98 high and moving to their highest level since Apr-98.
  
• After the trend line breakout, there was a brief pullback to support from the trend line extension. The stock consolidated for a few weeks and then advanced further on increased volume again.

• Rising Wedge (Bearish Reversal)

The Rising Wedge is a bearish pattern that begins wide at the bottom and contracts as prices move higher and the trading range narrows. In contrast to symmetrical triangles, which have no definitive slope and no bullish or bearish bias, rising wedges definitely slope up and have a bearish bias.

Even though this article will focus on the rising wedge as a reversal pattern, the pattern can also fit into the continuation category. As a continuation pattern, the rising wedge will still slope up, but the slope will be against the prevailing downtrend. As a reversal pattern, the rising wedge will slope up and with the prevailing trend. Regardless of the type (reversal or continuation), rising wedges are bearish.
 

    

        

Upper Resistance Line: It takes at least two reaction highs to form the upper resistance line, ideally three. Each reaction high should be higher than the previous high.

        Lower Support Line: At least two reaction lows are required to form the lower support line. Each reaction low should be higher than the previous low.

        Contraction: The upper resistance line and lower support line converge as the pattern matures. The advances from the reaction lows (lower support line) become shorter and shorter, which makes the rallies unconvincing. This creates an upper resistance line that fails to keep pace with the slope of the lower support line and indicates a supply overhang as prices increase.

        Support Break: Bearish confirmation of the pattern does not come until the support line is broken in a convincing fashion. It is sometimes prudent to wait for a break of the previous reaction low. Once support is broken, there can sometimes be a reaction rally to test the newfound resistance level.

        Volume: Ideally, volume will decline as prices rise and the wedge evolves. An expansion of volume on the support line break can be taken as bearish confirmation.
    The rising wedge can be one of the most difficult chart patterns to accurately recognize and trade. While it is a consolidation formation, the loss of upside momentum on each successive high gives the pattern its bearish bias. However, the series of higher highs and higher lows keeps the trend inherently bullish. The final break of support indicates that the forces of supply have finally won out and lower prices are likely. There are no measuring techniques to estimate the decline – other aspects of technical analysis should be employed to forecast price targets.
 

ANN provides a good example of the rising wedge as a reversal pattern that forms in the face of weakening momentum and money flow.

    Prior Trend: From a low around 10 in Oct-98, ANN surpassed 23 in less than 7 months. The final leg up was a sharp advance from below 15 in Feb. to 23.5 in mid-April.

    Upper Resistance Line: The upper resistance line formed with three successively higher peaks.

    Lower Support Line: The lower support line formed with three successive higher lows.

    Contraction: The upper resistance line and lower support line converged as the pattern matured. A visual assessment confirms that the slope of the lower support line is steeper than that of the upper resistance line. Less slope in the upper resistance line indicates that momentum is waning as the stock makes new highs.

    Support Break: The stock hugged the support line for over a week before finally breaking with a sharp decline. The previous reaction low was broken a few days later with long black candlestick (red arrow).

    Volume: Chaikin Money Flow turned negative in late April and was well below -10% when the support line was broken. There was an expansion of volume when the previous reaction low was broken.

Support from the April reaction low around 20 turned into resistance and the stock tested this level in early July before declining further.

• Rounding Bottom (Long Term Bullish Reversal)

The Rounding Bottom is rarely seen intraday and occurs most often on weekly charts. It is a great reversal pattern that you should keep an eye on after a stock has sold off for 1-2 years

The Rounding Bottom chart pattern analysis is usually conducted on a weekly chart. This is because this pattern is associated with a longer period of consolidation. Rounding bottoms start out with the bias to the down side but then as the trend is established and the pattern develops it turns its bias to the long side.
You can identify the Rounding Bottom pattern when doing your chart analysis with its saucer shaped bottom which is formed slightly less aggressive than other bottoming reversal patterns.

Powerful Reversal Pattern

The pattern does not vary too much in its development but can sometimes be mistaken at first as having similar characteristics as the Inverted Head and Shoulders. The difference arises with its saucer shaped bottom which develops over a longer term stopping it from becoming a V pivot (Bottom).
Support areas of the Rounding Bottoms are often harder to pin point from a chart analysis's point of view as like a V pivot you only get one reference point to mark as support.

Key Points in Formation:

1. Establish Trend - like any other reversal pattern there must be a long term established trend to reverse. Rounding Bottoms have to be formed after a significant long term down trend.
2. Left Side Decline - This decline is the first part of the price move and it has a tendency to be slightly volatile with multiple lower highs and lower lows. This is where the confusion can firstly begin of whether it is an Inverted Head and shoulder.
3. Low - After you have seen the progressive left decline, the low of the Rounding Bottom will start to be formed. This will be over a number of weeks so it does not appear to be a V pivot (bottom). This is what I deem to be the first confirmation of the Rounding Bottom Pattern.
4. Right Side Incline - For the incline to be confirmed it has to follow about the same time frame as what the left side decline took to fall to the low. As mentioned above if the incline is too steep the pattern may be in question.
5. Resistance - Analysing chart pattern resistance is all about looking to the left. The Rounding Bottom is no different and you can get your first major area of resistance plotted where left side decline starts which will be last major lower pivot high. On fig.1 we draw our resistance trend line horizontal from that point to where price action will meet from the right side incline.
6. Breakout - This is the confirmation that price action will continue to the upside breaking the last major lower high pivot which is our resistance trendline. Confirmation still needs to be that the price closes outside the resistance area. You can often see price returning to test the resistance trendline but it does not necessarily have to.

Powerful reveral pattern

Styles Traded - How can it be Traded:

1. Entry - Price breaks resistance area and closes above. This has a bigger stop loss but is more confirmation that it's on its way down.
2. Might Miss - Price retests the resistance trendline which now becomes support area.

How to trade the Rounding Bottom

Both trading style entries have their strength and weaknesses and will come down to the trading style of the individual trader and their tolerance to money management (R&R).

• Triple Top Reversal (Bearish Reversal)

What is Triple Top Chart Pattern?

Triple Top Pattern is very reliable, bearish reversal pattern. It is formed after an uptrend. It consists of three consecutive peaks or tops formed at a regular interval and of almost the same heights.
1.Top One: Top one or peak one is formed in continuation of the uptrend. There is a formation of new high followed by a pull back(10-20%) till the neckline(Support).
2.Top Two: Price again moves from neckline to make another high called the second top or peak 2 or resistance 2 followed by a pull back(10-20%) again till the neckline.
3.Top Three: Third top or third peak is formed when the price movers towards the resistance for the third time before giving a breakout.
4.Neckline Support: It is the line drawn through the bottom of the top one, top two till the top three. It serves as a important support to the pattern


Understanding Triple Top Chart Pattern:
 Triple top chart pattern is formed when the buyers have faith in the stock and take the price to a new high (Top1) but fails to continue so due to the resistance, results in a pull back. Again the buyers tries to rise the price but fails to get enough momentum to further increase the price result in a second pull back. Same sentiments of buyers are involved in the formation of third top. After all this attempts buyers looses their faith and sellers took over buyers resulting in the fall in price and reverse in the trend.
Duration: It takes several minutes to several months for this pattern to be formed. The longer the duration the more reliable the pattern is, after the breakout occurs.

Shape: Theoretically the triple top should be symmetrical that means all the three tops should be of nearly equal heights and spaced almost equally from each other. However practically the three highs are not necessarily of equal heights and spaced equally from each other. The tip of the top may be from pointed to round shape and hence for the neckline also its not necessary to be horizontal, it can be sloping upwards or downwards.

Breakout:It is very important for this pattern confirmation. Triple top is considered reliable only when the price closes below the neckline support or the confirmation point(lowest low of the pattern) and there is often high jump in volume. If the price don't close below the confirmation point then it may not be a triple top pattern.
One can often seen a pull back after a breakout which is in support of this pattern formation. However the important thing to note is the pull back is to test the neckline support which later becomes the resistance. It is always advisable to keep a stop loss in a pull back.

Volume: It plays a crucial role in confirming the pattern. With the formation of triple top chart pattern there is a decrease in volume. Therefore generally the volume is higher in the first peak, followed by second peak and third peak. A decrease in volume indicates that the buyers are loosing interest which is favorable to the formation of the pattern. Near breakout there in an increase in volume which further confirms the reliability of the pattern.
Price Target:A rough price target can be calculated by measuring the vertical distance between the highest peak (resistance) and the neckline support. However other technical indicators have to keep in mind here as well.

• Triple Bottom Reversal (Bullish Reversal)

What is Triple Bottom Chart Pattern?

Triple Bottom Pattern is very reliable, bullish reversal pattern. It is formed after an downtrend. It consists of three consecutive bottoms formed at a regular interval and of almost the same heights. 1.Bottom One: Bottom one is formed in continuation of the downtrend. There is a formation of new low followed by a pull back(10-20%) till the neckline(Resistance). 2.Bottom Two: Price again moves from neckline to make another low called the second bottom or followed by a pull back(10-20%) again till the neckline. 3.Bottom Three: Third bottom is formed when the price movers towards the resistance for the third time before giving a breakout. 4.Neckline Resistance: It is the line drawn through the first bottom till the third bottom. It serves as a important resistance to the pattern.

Understanding Triple Bottom Chart Pattern:
Triple bottom chart pattern is formed when the sellers have faith that the stock price will go down further which leads to a new low (bottom1) but fails to continue so, due to the Support Basics, results in a pull back. Again the sellers tries to reduce the price but fails to get enough momentum to further decrease the price which results in a second pull back. Same sentiments of sellers are involved in the formation of third bottom. After all this attempts sellers looses their faith and buyers took over sellers resulting in the rise in price and reverse in the trend. Duration: It takes several minutes to several months for this pattern to be formed. The longer the duration the more reliable the pattern is, after the breakout occurs.
Shape: Theoretically the triple bottom should be symmetrical that means all the three bottoms should be of nearly equal heights and spaced almost equally from each other. However practically the three lows are not necessarily of equal heights and spaced equally from each other. The tip of the bottom may be from pointed to round shape and hence for the neckline also its not necessary to be horizontal, it can be sloping upwards or downwards.

Breakout:It is very important for this pattern confirmation. Triple bottom is considered reliable only when the price closes below the neckline support or the confirmation point(lowest low of the pattern) and there is often high jump in volume. If the price don't close below the confirmation point then it may not be a triple bottom pattern.

One can often seen a pull back after a breakout which is in support of this pattern formation. However the important thing to note is the pull back is to test the neckline which later becomes the support.It is always advisable to keep a stop loss in a pull back.
Volume:Volume plays a crucial role in confirming the pattern. With the formation of triple bottom chart pattern there is a decrease in volume. Therefore generally the volume is higher in the first bottom, followed by second bottom and third bottom. A decrease in volume indicates that the sellers are loosing interest which is favorable to the formation of the pattern. Near breakout there in an increase in volume which further confirms the reliability of the pattern showing that the buyers are taking over the sellers.

Price Target.A rough price target can be calculated by measuring the vertical distance between the highest bottom (support) and the neckline resistance. However other technical indicators have to keep in mind here as well.

Triple Bottom Chart Pattern Formed By Sun Pharmaceutical Ltd-Example1

•  Bump and Run Reversal (Reversal)

As the name implies, the Bump and Run Reversal (BARR) is a reversal pattern that forms after excessive speculation drives prices up too far, too fast. Developed by Thomas Bulkowski, the pattern was introduced in the June-97 issue of Technical Analysis of Stocks and Commodities and also included in his book, the Encyclopedia of Chart Patterns.
The pattern was originally named the Bump and Run Formation, or BARF. Bulkowski decided that Wall Street was not ready for such an acronym and changed the name to Bump and Run Reversal. Bulkowski identified three main phases to the pattern: lead-in, bump, and run. We will examine these phases and also look at volume and pattern validation. 

1. Lead-in Phase: The first part of the pattern is a lead-in phase that can last 1 month or longer and forms the basis from which to draw the trend line. During this phase, prices advance in an orderly manner and there is no excess speculation. The trend line should be moderately steep. If it is too steep, then the ensuing bump is unlikely to be significant enough. If the trend line is not steep enough, then the subsequent trend line break will occur too late. Bulkowski advises that an angle of 30 to 45 degrees is preferable. The size of the angle will depend on the scaling (semi-log or arithmetic) and the size of the chart. It is probably easier to judge the soundness of the trend line with a visual assessment.
   
2. Bump Phase: The bump forms with a sharp advance, and prices move further away from the lead-in trend line. Ideally, the angle of the trend line from the bump's advance should be about 50% greater than the angle of the trend line extending up from the lead-in phase. Roughly speaking, this would call for an angle between 45 and 60 degrees. If it is not possible to measure the angles, then a visual assessment will suffice.
   
3. Bump Validity: It is important that the bump represent a speculative advance that cannot be sustained for a long time. Bulkowski developed what he calls an “arbitrary” measuring technique to validate the level of speculation in the bump. The distance from the highest high of the bump to the lead-in trend line should be at least twice the distance from the highest high in the lead-in phase to the lead-in trend line. These distances can be measured by drawing a vertical line from the highest highs to the lead-in trend line. An example is provided below.
   
4. Bump Rollover: After speculation dies down, prices begin to peak and a top forms. Sometimes, a small double top or a series of descending peaks forms. Prices begin to decline towards the lead-in trend line, and the right side of the bump forms.
   
5. Volume: As the stock advances during the lead-in phase, volume is usually average and sometimes low. When the speculative advance begins to form the left side of the bump, volume expands as the advance accelerates.
   
6. Run Phase: The run phase begins when the pattern breaks support from the lead-in trend line. Prices will sometimes hesitate or bounce off the trend line before breaking through. Once the break occurs, the run phase takes over, and the decline continues.
   
7. Support Turns Resistance: After the trend line is broken, there is sometimes a retracement that tests the newfound resistance level. Potential support-turned-resistance levels can also be identified from the reaction lows within the bump.

The Bump and Run Reversal pattern can be applied to daily, weekly or monthly charts. As stated above, the pattern is designed to identify speculative advances that are unsustainable for a long period. Because prices rise very fast to form the left side of the bump, the subsequent decline can be just as ferocious. 

Level Three Communications (LVLT) formed a Bump and Run Reversal pattern after prices advanced in a speculative frenzy at the beginning of 2000. Prices advanced from 72 to 132 in 2 months and this advance ultimately proved unsustainable.

• The lead-in phase formed over a 3 month period from early Oct-99 to early Jan-00. Volume during this phase was relatively subdued, and actually declined during the November and December advance.
  
• The trend line extending up from the lead-in phase lows formed a 34-degree angle. A visual assessment also reveals that this trend line is neither too steep nor too flat.
  
• The bump phase began in early January when the advance accelerated with a large increase in volume. A conservatively drawn trend line formed a 51-degree angle that was exactly 50% larger than the angle from the lead-in trend line.
  
• The distance from the lead-in phase's highest high to the trend line was 13. The distance from the bump phase's highest high to the trend line was 38. This is almost three times larger, and validates the speculative excesses in the bump.
  
• After reaching a high around 132, prices declined sharply, and bounced off the lead-in trend line. A lower high formed around 115 (red arrow), and the trend line was soon broken.
  
• The decline continued after the trend line break, and reached 67 before a reaction rally began. The reaction rally advanced to around 95, but fell just short of the horizontal support line before falling back to new lows.

 Note: Classified these chart patterns as to whether they are typically reversal or continuation patterns, but many can indicate either a reversal or a continuation, depending on the circumstances.