Graphic Formations

Apart from the tendency lines and channels, the technical analysts identify a series of formations. They are price movements that when represented in charts they form determined figures. Some formations indicate a change of tendency, and because of it, they are denominated “change formations.”

Others denominated as continuous formations, reflect pauses or a temporary turnovers in an existing tendency, and by a general rule they are more quickly formed than the change formations.

Change formations

Head and shoulders
The most indicative of the known change formations is that of head and shoulders. It has three clear peaks, and the central peak (head) is higher than the former and that follows (shoulders).

The low neck of neckline is the line that connects the two valleys. When the price falls below the neckline, the formation is completed and the change is consolidated.

A rupture void situated at the level of the neck reinforces the probability that there has been a true change. The minimum extension of the change can be estimated. For it, measure the distance that there is from the head to the neck and then project this same distance from the intersection with the neck.

It is possible that return movements may be produced, but the usual is for them not to go again through this line. There are two varieties of this type of formation: the straight (head on top) and the inverted (head of the bottom).

Saucers
This formation is known by many names. In an ascending tendency it is usually called inverted saucer or rounded ceiling, while that in a descending tendency it receives the name of rounded bottom or bowl. Leaving names aside, the formation consists in a gradual change of the tendency, it coincides with a gradual diminishing and increasing (or gradual increasing and diminishing) of the contracting volume.

The saucer does not give a precise measure of the extension of the change. The size and duration of the former tendency conditions in some way the new tendency and also does the time, which the saucer needs to be formed.

There are other criterions such as the previous support and resistance levels, the voids, the primary tendency lines, etc.

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