Test chart patterns with confirmation, not names

A name is only a sketch

Two peaks or troughs near the same price become a completed double top or double bottom only after a close through the confirmation point, the extreme between those swings. That close is the test that separates a look-alike sketch from a completed pattern.

A head-and-shoulders structure is a multi-swing reversal sketch with a central extreme and flanking shoulders. It stays hypothetical until price closes through the neckline, the reference line across the intervening swings. A flag or pennant is a brief pause after a sharp thrust, including the high, tight flag, and is a continuation hypothesis rather than a finished signal. The high, tight flag is the compact form of that pause after a very large, fast prior advance, and it is judged on the break from the pause.

Start with a close that can kill the idea

In a five-year daily sample of 1,280 twin-peak structures, 826 cases, or 65 percent, never closed below the intervening low and were therefore not treated as completed double tops.

Waiting for a close below that intervening low reduced the double-top failure rate in the same sample to 17 percent, after which 83 percent of cases continued lower by more than 5 percent.

Then rank the survivors

Among the confirmed double tops, closer peaks, deeper intervening troughs, and high-volume downside breaks were each associated with larger subsequent declines.

Across 542 double bottoms, troughs about three weeks apart were followed by average rises of 42 percent, compared with 23 percent when the troughs were about four months apart.

Editorial: those features are the second gate. They rank a completed idea. They do not replace the confirming close.

A flag is still a pause

Among 35 bullish pattern variations compared in the review, the high, tight flag showed a 63 percent average subsequent rise, versus 38 percent for the bullish set as a whole.

Editorial: a higher average rise in that historical comparison does not make the name a signal. The high, tight flag remains a flag-and-pennant pause until the break from the pause.

Grade the neckline, not the name

Among 32 bearish pattern variations compared in the review, the complex head-and-shoulders top showed a 27 percent average subsequent decline, versus 21 percent for the bearish set as a whole.

Complex head-and-shoulders tops with downsloping necklines showed a 27 percent average decline, compared with 26 percent when the neckline was level.

Complex head-and-shoulders bottoms with a downsloping neckline were associated with larger subsequent rises than those with a rising neckline, and high-volume neckline breaks were linked to larger follow-through.

Editorial: neckline slope is part of the evaluation, not decoration. The first gate remains the close through the neckline.