V FORMATIONS PATTERN

V FORMATIONS

In the stock market, as elsewhere, where there is profit, there is a risk. And, generally speaking, the greater the potential profit, the greater the risk. So it is with a certain group of chart reversal patterns that are so powerful that they spark the most dynamic of all price swings but, unfortunately, are among the hardest to anticipate or analyze. In fact, even after they are completed, the most experienced chartist can’t be certain that trends will follow through in a normal way. These elusive chart patterns are known as V Formations.

In other reversal patterns, buyers and sellers vie for dominance over a more or less extended period, with one group and then the other alternating in the lead. This interplay of forces may be said to prepare the market for a reversal and to alert the chartist. Not so with a V Formation. As the name implies, there is no such preparation. The progressive shift from a downtrend to an uptrend, which is a function of other reversal patterns, is absent.

Instead, the V-turn strikes with little warning; it’s dramatic and final. It’s as though, by some prearranged signal, all the stock that sellers have to offer has been suddenly taken up, and buyers remain the dominant force for some time to come.

Hence, V Formations signal sharp reversals in trend, but at the same time are among the most difficult to analyze. Nevertheless, there are a few positive clues that can be of assistance in catching a good number of these moves. And because the price swings that follow are often substantial, it pays to master these patterns. At the end of this chapter, we will carefully examine a number of actual market situations in an effort to lessen the mystery.

But first, let us define our V patterns. There are two kinds: the True V and the Extended V.

THE TRUE V FORMATION

The typical true V (Figure 31) is V-shaped indeed, and has three components:

·       Downtrend: More often than not, the decline that marks the left arm of a V is fairly sharp and extensive, but it may be quite slow and irregular —just so the trend is down.

·       Pilot: A single day’s action frequently marks the low point of the decline. At times, the turn is more gradual, but rarely does the price pause in this region for more than a few days. In most instances, volume picks up noticeably near the lows. Sometimes, the heaviest volume will be registered on the very day of the turning point, marking this as a climax day.

·       Uptrend: The first signal of a turn is given when the stock price penetrates a downtrend line, which has been drawn along the rally peaks of the preceding decline. After the turn, volume tends to pick up gradually as the move progresses. The early part of this phase is the trouble spot, because until the move has gone far enough, we can’t be sure that the formation is a valid V-turn. However, the uptrend phase of the true V will tend to duplicate the preceding downtrend leg. If the downtrend, A, measures down as a 45 degree angle, the uptrend, C, is likely to measure up as a 45 degree angle.

INVERTED TRUE V

The Inverted True V marks a top and is, as its name indicates, the opposite of the V bottom. In a great majority of cases, volume picks up sharply around the pivot, and this forms an upside-down V on the volume scale, as well as the price. Sometimes, however, volume on the turn is relatively normal or even unusually light.