I have often covered potential long setups and bullish patterns.
There are, however, patterns that exist that signal a change of character and an end to a bullish move.
Both long and short traders use these patterns.
Long traders might use these patterns and information to close out a long position and protect their profit.
Traders focused on the short side might use the patterns and shift in momentum to initiate a short position.
It is essential to understand the numerous chart patterns that might signal a change of direction in the stock.
I am going to go over four chart patterns that signal a change of character.
Blow Off Top
A blow-off top exists when a stock has extended higher quickly and exhausted both the buyers and sellers in the stock. Typically, the highest volume on the day is done near the price at which the stock tops out. The range expansion is usually largest leading up to the blow-off top.
Notice in the chart above how the range expanded, on the one-minute bars, leading up to the blow-off top. Also, notice the volume increase when the stock was in the process of topping out. Both the volume and range expansion indicate a blow-off top.
A blow-off top might be an excellent signal to close out a long position as the stock will typically trade lower once the top is confirmed.
A break in a stock’s uptrend might signal an immediate shift in momentum and, therefore, could be used as a signal to close out a long position and protect earned profits.
The trend break occurs when a stock is no longer able to hold the support of an uptrend.
In the above example, notice how the stock is no longer able to hold the upward channel. Once the stock broke below the support of the uptrend, the momentum shifted to the downside. The stock went from making higher highs and higher lows to making lower highs and lower lows.
The break of the uptrend support might have been an excellent signal to close out a long position.
Support Turns into Resistance
Another change of character and sign of a momentum shift is when a stock sees its critical support turn into critical resistance.
Support turning into resistance signals the momentum shifting in favor of the bears from the bulls.
Notice in the chart above how critical support later became resistance as the stock could no longer reclaim and hold above previous support. This change of character signaled a significant shift in momentum and might have been used as a signal to be short or cover a long position.
The False Breakout
A false breakout signals an immediate shift in momentum and might be used as a signal to close a long or open a short position.
The false breakout occurs when a stock attempts to break above a consolidation or resistance level and immediately fails at the critical level and then trades lower.
Notice in the chart above how the stock attempted to break over pre-market resistance. The move was met with increased volume and immediately failed at resistance. The failure at resistance signaled a false breakout.
The Bottom Line
Identifying these setups and changes of character might help you manage risk more effectively and protect yourself against unnecessary losses.