Self Directed Investor Inc
SDI: "Empowering investors with ideas and education"
Symbol Lookup »  
Topics:ChinaETFsEarningsEconomyEnergyForexGoldIncomeLessonsIdeasTrading

  • Other news: News from PR Newswire
| More

The 5 Most Important Chart Patterns For ETF Traders

Wed, Dec 5, 9:15 AM ET, by Michael Johnston

Chart patterns are a very useful tool because they occur regularly—providing you with lots of trade candidates—and also provide everything you need to trade. When you spot an ETF chart pattern, and know how to utilize it, the pattern provides you with an entry point, stop-loss price as well as a profit target. While no strategy is perfect, and chart patterns don't produce a profit all the time, learning to use them in your trading can greatly enhance your ability to analyze and profit from ETFs [see ETF Technical Trading FAQ].

1. Head and Shoulders

The head and shoulders is a topping pattern, signaling an uptrend is likely over and a downtrend is commencing. The pattern is created when the price rises (left shoulder), then dips, rises again to a new high (head), declines, and then rallies again but not as high as the previous rally (right shoulder).

Usually the left and right shoulder will reach similar heights, although in the real-world these levels may vary marginally from one another [see 3 ETF Trading Tips You Are Missing].

The SPDR Select Sector Financial (XLF, A) created a head and shoulders pattern in early 2011, and ultimately foretold of a significant top in the ETF.

Figure 1: Financial Sector ETF - Head and Shoulders Pattern

That the right shoulder is lower than the head shows the market is losing momentum, but the pattern is not complete until the price moves below the neckline or the breakout point. The neckline is a trendline connecting the lows of the pullbacks, also called "armpits." The breakout point is simply the lowest point in the pattern. Either can be used as an entry point—when the price drops below either of these levels it signals a further decline.

Once a trade is made, a stop loss can be placed just above the right shoulder to limit. The total height of the formation—the top of the head minus the lowest low—can be used to establish a profit target as well.

The high of the formation in figure 1 is $17.20 and low between the head and right shoulder is $16.24, therefore the height is $0.96. The height is subtracted from the low point of the formation to get a profit target: $16.24 minus $0.96 to get $15.28. In this case, the market fell much further than the target price.

While the pattern can be used to enter short trades, it is also a warning to those that are long that a correction is likely coming.

2. Inverse Head and Shoulders

There is also an inverse head and shoulders pattern. This occurs at market bottoms and is the same as the normal head and shoulders except that it is flipped upside down. In the summer of 2012 this pattern appeared in the S&P 500 SPDR (SPY, A) ETF and signaled a trend reversal [see also Free Report: How To Pick The Right ETF Every Time].

Figure 2: S&P 500 SPDR - Inverse Head and Shoulders Pattern

The neckline, as in Figure 1, is too steep to be of use for an entry signal. Therefore, the pattern completes and an entry is taken when the price moves through the breakout line (high point of the armpits). A stop is placed just below the right shoulder and the target is calculated by adding the height of the formation (high point minus low of the head) to the breakout price.

3. Triangles

These patterns are quite common as the three different types of triangles are created by converging price action. Trendlines are used to draw the pattern, and an entry is signaled when the price moves above or below either of the trendlines.

Symmetric
Symmetric triangles occur when the price is making lower highs and higher lows; when you draw the trendlines both trendlines will move towards each other. The SPDR Select Sector Technology ETF (XLK, A+) created a symmetric triangle in late 2011.

Figure 3: Technology ETF - Symmetric Triangle

The price broke through the upper trendline of the triangle—a long entry trigger–signaling an upside breakout and a move higher. A stop is placed just outside the opposite side of the triangle [see also 5 Simple ETF Trading Tips].

The target is calculated by taking the height of the formation and adding it to the breakout point. In this case, the high was $26.54 and the low was $24.01 for a height of $2.53. The breakout price was $25.90, so the target is $28.43.

Ascending
Everything is the same for the ascending triangle, except for its look. With an ascending triangle, the ETF is making higher lows, but the highs are reaching similar price levels on each swing. Figure 4 shows how this looks on a chart of the SPDR Dow Jones Industrial Average ETF (DIA, B).

Figure 4: Dow Jones ETF - Ascending Triangle

Entry, stop losses and targets are all entered in the same way as a symmetric triangle.

Descending
Descending triangles occur when the price of an ETF is making lower highs, but the lows are reaching similar levels on each swing. A descending triangle occurred in the SPDR Select Sector Utilities ETF (XLU, A) in early 2012.

Figure 5: Utilities ETF - Descending Triangle

Entry, stop losses and targets are all entered in the same way as the other two triangle formations.

4. Double Top and Bottom

When looking for a reversal, check for a double top or double bottom. A double top occurs when the price peaks, pulls back and then rallies back to very near the first high. The double top is complete, and a short entry taken, when the price falls below the low of the pullback. Figure 6 shows a double top that occurred in the S&P 500 SPDR ETF in 2012 [see 5 Important ETF Lessons In Pictures].

Figure 6: S&P 500 SPDR - Double Top

A stop can be placed above the highs, although this means the risk can be quite large in some cases. The profit target is calculated by taking the height of the formation and subtracting it from the breakout price/low point of the pattern. In this case, the highs reached $141.66 (lower of the two highs) and the pullback low was $135.76, for a height of $5.90. Subtract that from the $135.76 to get a target of $129.86.

A double bottom indicates a decline has ended and a rise is likely to ensue. Everything is the same as the double top except the pattern is flipped upside down. The SPDR Select Sector Energy ETF (XLE, A) had a double bottom in mid-2012.

Figure 7: Energy Sector ETF - Double Bottom

 

5. Triple Top and Bottom

Triple tops and bottoms are very similar to double tops and bottoms, except there are three price extremes instead of two. The United States Natural Gas Fund (UNG, B+) shows a triple top at the end of 2010 and early 2011 [Download 101 ETF Lessons Every Financial Advisor Should Learn].

Figure 8: Natural Gas ETF - Triple Top

Once the three peaks occur, an entry is signaled when the price moves below the lowest correction in the pattern. A stop is placed above the highest price peak. The target is calculated by taking the height of the formation and subtracting it from the breakout price. While the trade in this example would not have been stopped out, it did take several months for the price to reach the target.

A triple bottom indicates a decline has ended and a rise is likely to ensue. Everything is the same as the double top except the pattern is flipped upside down. The ProShares UltraShort S&P 500 ETF (SDS, B) had a triple bottom in mid-2012.

Figure 9: Ultrashort S&P 500 ETF - Triple Bottom

 

Putting it Together

Chart patterns can greatly enhance your ability to trade and analyze ETFs. Not every chart pattern you trade will be profitable, but you will always know your downside and upside before you enter; if the risk is too much, or the reward too little for your liking, skip the trade. It will take some time to train your eyes to spot these patterns, but once you start to see them you will be able to capture more trends and avoid more reversals. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit-taking techniques.

Charts made with Freestockcharts.com

[For more ETF analysis, make sure to sign up for our free ETF newsletter or try a free seven day trial to ETFdb Pro]

Disclosure: No positions at time of writing.

Click here to read the original article on ETFdb.com.


SDI Glossary: "price" Definition
SDI Glossary: "ETFs" Definition
SDI Glossary: "Sector" Definition
SDI Glossary: "Short" Definition
SDI Glossary: "Trend" Definition
This Article's Word Cloud:   Figure   Head   SPDR   Sector   Select   Shoulders   also   below   bottom   breakout   calculated   chart   created   double   entry   except   formation   from   head   height   high   highs   levels   lower   moves   occur   pattern   patterns   placed   point   price   profit   right   same   shoulder   shoulders   shows   similar   stop   taking   target   that   this   trade   triangle   upside   used   when   will   your

| More

KME Crosses Above Key Moving Average Level
Fri, Aug 29, 4:14 PM ET, by ETF Channel

In trading on Friday, shares of the SPDR S&P Mortgage Finance ETF (KME) crossed above ...

Shares of RINF Now Oversold
Fri, Aug 29, 3:54 PM ET, by ETF Channel

In trading on Friday, shares of the Proshares 30 Year TIPS/TSY Spread ETF (RINF) entered ...

See How Chevron Ranks Among Analysts' Top Dow 30 Picks
Fri, Aug 29, 11:54 AM ET, by ETF Channel

A study of analyst recommendations at the major brokerages shows that Chevron Corporation (CVX) is ...

Vanguard Health Care ETF Experiences Big Inflow
Fri, Aug 29, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: VHT Exchange traded funds (ETFs) trade just like stocks, but ...

IYR, SPG, AMT, CCI: ETF Inflow Alert
Fri, Aug 29, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: IYR, SPG, AMT, CCI Exchange traded funds (ETFs) trade just ...

EWP: ETF Outflow Alert
Fri, Aug 29, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: EWP Exchange traded funds (ETFs) trade just like stocks, but ...

Vanguard Extended Market ETF Experiences Big Inflow
Fri, Aug 29, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: VXF Exchange traded funds (ETFs) trade just like stocks, but ...

Lockheed Martin a Top 25 Dividend Giant With 3.06% Yield (LMT)
Fri, Aug 29, 8:14 AM ET, by ETF Channel

Lockheed Martin Corp. (LMT) has been named as a Top 25 ''Dividend Giant'' by ETF ...

Why Cincinnati Financial is a Top 25 SAFE Dividend Stock (CINF)
Fri, Aug 29, 8:14 AM ET, by ETF Channel

Cincinnati Financial Corp. (CINF) has been named to the Dividend Channel ''S.A.F.E. ...

General Dynamics Achieves #117 Analyst Rank, Surpassing Prudential Financial
Thu, Aug 28, 12:14 PM ET, by ETF Channel

In a study of analyst recommendations at the major brokerages, for the underlying components of ...

IEMG, BAP, MBT, SCCO: ETF Inflow Alert
Thu, Aug 28, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: IEMG, BAP, MBT, SCCO Exchange traded funds (ETFs) trade just ...

IYM, LYB, PX, FCX: Large Inflows Detected at ETF
Thu, Aug 28, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: IYM, LYB, PX, FCX Exchange traded funds (ETFs) trade just ...

BLV: ETF Inflow Alert
Thu, Aug 28, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: BLV Exchange traded funds (ETFs) trade just like stocks, but ...

IEF: Large Outflows Detected at ETF
Thu, Aug 28, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: IEF Exchange traded funds (ETFs) trade just like stocks, but ...

Proshares Short 20+ Year Treasury Getting Very Oversold
Thu, Aug 28, 10:54 AM ET, by ETF Channel

In trading on Thursday, shares of the Proshares Short 20+ Year Treasury ETF (TBF) entered ...

iShares MSCI Switzerland Capped Breaks Below 200-Day Moving Average - Notable for EWL
Thu, Aug 28, 10:54 AM ET, by ETF Channel

In trading on Thursday, shares of the iShares MSCI Switzerland Capped ETF (EWL) crossed below ...

TTT Crowded With Sellers
Thu, Aug 28, 10:54 AM ET, by ETF Channel

In trading on Thursday, shares of the Proshares UltraPro Short 20+ Year Treasury ETF (TTT) ...

TMV Crosses Critical Technical Indicator
Thu, Aug 28, 10:54 AM ET, by ETF Channel

In trading on Thursday, shares of the Daily 20+ Year Treasury Bear 3x Shares ETF ...

11.7% of FPX Holdings Seeing Recent Insider Buys
Thu, Aug 28, 9:54 AM ET, by ETF Channel

A look at the weighted underlying holdings of the First Trust US IPO Index Fund ...

Cullen/Frost Bankers a Top Ranked SAFE Dividend Stock With 2.6% Yield (CFR)
Thu, Aug 28, 9:54 AM ET, by ETF Channel

Cullen/Frost Bankers, Inc. (CFR) has been named to the Dividend Channel ''S.A.F.E. ...

CenturyLink a Top Socially Responsible Dividend Stock With 5.3% Yield (CTL)
Thu, Aug 28, 9:54 AM ET, by ETF Channel

CenturyLink, Inc. (CTL) has been named a Top Socially Responsible Dividend Stock by Dividend Channel, ...

Canadian Dollar Trust (FXC) Shares Cross Above 200 DMA
Wed, Aug 27, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the Canadian Dollar Trust ETF (FXC) crossed above their ...

GDX, GG, ABX, NEM: ETF Inflow Alert
Wed, Aug 27, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: GDX, GG, ABX, NEM Exchange traded funds (ETFs) trade just ...

FXU, POM, TDS, GXP: Large Outflows Detected at ETF
Wed, Aug 27, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: FXU, POM, TDS, GXP Exchange traded funds (ETFs) trade just ...

QQQ, AAPL, MSFT, GOOG: Large Inflows Detected at ETF
Wed, Aug 27, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: QQQ, AAPL, MSFT, GOOG Exchange traded funds (ETFs) trade just ...

KRE, CIT, UBSI, HBAN: Large Inflows Detected at ETF
Wed, Aug 27, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: KRE, CIT, UBSI, HBAN Exchange traded funds (ETFs) trade just ...

iShares Russell 1000 Value ETF Experiences Big Inflow
Wed, Aug 27, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: IWD, GE, JNJ, WFC Exchange traded funds (ETFs) trade just ...

CURE: Large Outflows Detected at ETF
Wed, Aug 27, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: CURE Exchange traded funds (ETFs) trade just like stocks, but ...

IJH, URI, SLG, HSIC: Large Inflows Detected at ETF
Wed, Aug 27, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: IJH, URI, SLG, HSIC Exchange traded funds (ETFs) trade just ...

VUG, FB, AMGN, AXP: ETF Inflow Alert
Wed, Aug 27, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: VUG, FB, AMGN, AXP Exchange traded funds (ETFs) trade just ...

11.6% of FTHI Holdings Seeing Recent Insider Buys
Wed, Aug 27, 9:44 AM ET, by ETF Channel

A look at the weighted underlying holdings of the First Trust High Income ETF (FTHI) ...

MO a Top 25 Dividend Giant With $3.11B Held By ETFs
Wed, Aug 27, 8:14 AM ET, by ETF Channel

Altria Group Inc (MO) has been named as a Top 25 ''Dividend Giant'' by ETF ...

Analog Devices a Top Socially Responsible Dividend Stock With 2.8% Yield (ADI)
Wed, Aug 27, 8:14 AM ET, by ETF Channel

Analog Devices, Inc. (ADI) has been named a Top Socially Responsible Dividend Stock by Dividend ...

PowerShares Cleantech Portfolio (PZD) Shares Cross Above 200 DMA
Tue, Aug 26, 3:54 PM ET, by ETF Channel

In trading on Tuesday, shares of the PowerShares Cleantech Portfolio ETF (PZD) crossed above their ...

Navient Achieves #139 Analyst Rank, Surpassing Dover
Tue, Aug 26, 11:54 AM ET, by ETF Channel

In a study of analyst recommendations at the major brokerages, for the underlying components of ...

OIH, SLB, NOV, SDRL: Large Inflows Detected at ETF
Tue, Aug 26, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: OIH, SLB, NOV, SDRL Exchange traded funds (ETFs) trade just ...

FCG Makes Bullish Cross Above Critical Moving Average
Tue, Aug 26, 10:54 AM ET, by ETF Channel

In trading on Tuesday, shares of the First Trust ISE-Revere Natural Gas Index Fund ETF ...

NGE Crosses Critical Technical Indicator
Tue, Aug 26, 10:54 AM ET, by ETF Channel

In trading on Tuesday, shares of the MSCI Nigeria ETF (NGE) entered into oversold territory, ...

10.1% of FYC Holdings Seeing Recent Insider Buys
Tue, Aug 26, 9:44 AM ET, by ETF Channel

A look at the weighted underlying holdings of the First Trust Small Cap Growth AlphaDEX ...

Home Depot a Top 25 Dividend Giant With 2.07% Yield (HD)
Tue, Aug 26, 8:34 AM ET, by ETF Channel

Home Depot Inc (HD) has been named as a Top 25 ''Dividend Giant'' by ETF ...

Shares of HYXU Now Oversold
Mon, Aug 25, 4:14 PM ET, by ETF Channel

In trading on Monday, shares of the iShares Global ex USD High Yield Corporate Bond ...

Proshares USD Covered Bond Breaks Above 200-Day Moving Average - Bullish for COBO
Mon, Aug 25, 4:14 PM ET, by ETF Channel

In trading on Monday, shares of the Proshares USD Covered Bond ETF (COBO) crossed above ...

Swedish Krona Trust (FXS) Enters Oversold Territory
Mon, Aug 25, 4:14 PM ET, by ETF Channel

In trading on Monday, shares of the Swedish Krona Trust ETF (FXS) entered into oversold ...

UPV Makes Bullish Cross Above Critical Moving Average
Mon, Aug 25, 4:14 PM ET, by ETF Channel

In trading on Monday, shares of the Proshares Ultra FTSE Europe ETF (UPV) crossed above ...

Kinder Morgan Moves Up In Analyst Rankings, Passing Mallinckrodt
Mon, Aug 25, 11:54 AM ET, by ETF Channel

In a study of analyst recommendations at the major brokerages, for the underlying components of ...

VDE, OXY, HAL, APA: ETF Outflow Alert
Mon, Aug 25, 11:24 AM ET, by ETF Channel

Symbols mentioned in this story: VDE, OXY, HAL, APA Exchange traded funds (ETFs) trade just ...

IJS, TQNT, THS, EPR: Large Outflows Detected at ETF
Mon, Aug 25, 11:24 AM ET, by ETF Channel

Symbols mentioned in this story: IJS, TQNT, THS, EPR Exchange traded funds (ETFs) trade just ...

VGT, CRM, CTSH, GLW: Large Inflows Detected at ETF
Mon, Aug 25, 11:24 AM ET, by ETF Channel

Symbols mentioned in this story: VGT, CRM, CTSH, GLW Exchange traded funds (ETFs) trade just ...

EDC: Large Outflows Detected at ETF
Mon, Aug 25, 11:24 AM ET, by ETF Channel

Symbols mentioned in this story: EDC Exchange traded funds (ETFs) trade just like stocks, but ...

iShares U.S. Consumer Goods ETF Experiences Big Outflow
Mon, Aug 25, 11:24 AM ET, by ETF Channel

Symbols mentioned in this story: IYK, MO, MDLZ, KMB Exchange traded funds (ETFs) trade just ...

Related videos | all videos »
  More articles:  1 2 3 4 5 6 7 next »

ABOUT US »   ADVERTISE »   CONTACT US »   TERMS OF USE & PRIVACY POLICY »

The 5 Most Important Chart Patterns For ETF Traders | Self Directed Investor | Copyright © 2008 - 2014, All Rights Reserved

Any ideas and opinions presented in Self Directed Investor content are for informational and educational purposes only, and do not reflect the opinions of BNK Invest, Inc. or any of its affiliates, subsidiaries or partners. In no way should any content contained herein be interpreted to represent trading or investment advice. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. All site visitors agree that under no circumstances will BNK Invest, Inc,. its subsidiaries, partners, officers, employees, affiliates, or agents be held liable for any loss or damage caused by your reliance on information obtained. Read Full Disclaimer.

SDI is associated with: ValueForum.com -- a subscription-based online social networking forum of over 1000 individual investors. | MarketNewsVideo.com -- videos appearing on SDI are produced by Market News Video. | TickerTech.com -- stock quote content appearing on SDI is at least 20 minutes delayed and is powered by Ticker Technologies. | GoldStockStrategist.com -- Edited by Scott V. Nystrom, PhD, Gold Stock Strategist provides analysis on gold mining companies.