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When a market continues to hold against a resistance level and refuses to turn down after several instances of threatening price action, one has to consider absorption is taking place. Absorption is the process through which the long liquidation, profit‐taking, and new short selling are overcome. It can show up on any chart, regardless of the time frame.

A double bottom acts as a reversal chart pattern most often, formed by two valleys that bottom near the same price. The height of the sides of the pattern are often shorter than you see in a big W, but need not be. This chapter examines the double bottom from a performance overview, to identification, to detailed trading setups. Season the mix with the best stop location, measure rule, and configurations to avoid or embrace, and you have a tasty treat suitable for traders.

A chart pattern can act as a reversal of the price trend or signal a continuation of that trend, but which type performs better? Does the breakout direction matter for performance from chart patterns that act as reversals or continuations? This chapter answers those questions and explains what reversals and continuations are, how they behave, and shows which type works best and under what conditions.

This chapter explores the innovative uses of price break charts in option trading. Price break charts can assist the trader in deriving option trading strategies and tactics. The option trader is essentially making a directional decision on the trade. He anticipates the move based on his evaluation of market conditions, and the strength of that evaluation will essentially determine the outcome. This is in contrast to the spot trader, who reacts to the action and tries to join a move. Since the proposed option trade is either a pattern or trend continuation trade or one that anticipates a reversal of the trend, price break charts can become a key tool in confirming the strength of that analysis. Additionally, once the anticipated direction is established, the trader needs to select the strike prices. Price break charts offer a methodology for choosing the strike price locations. An option trader's first priority is to establish a direction for a trade. A trader can make this directional decision in many ways, but price break charts is a useful tool for selecting direction. Once the trader selects a direction, the critical next step is to identify which strike price to put on the trade. Price break charts give powerful criteria for selecting an option strike price, and can be particularly useful for spread positions.

This chapter discusses gaps; those that appear at a chart pattern breakout for pushing the stock. Traders’ ability to decipher the gap type can help them determine the future of the stock. There are four major types of gaps: area, breakaway, continuation, and exhaustion. Consequently, breakaway gap always leaves a congestion area; where price moves sideways for a time. It can be just a few days wide—or more—like that circled. The breakaway gap breaks away from the area, hence its name. A continuation gap is also known as a measuring gap because it sometimes forms midway in a price trend. Exhaustion gap are very large gaps, especially well into a trend.

Flags are short chart patterns that appear as small rectangles in a strong price run. They can act as reversals, but are usually continuation patterns. A pennant is a short triangular‐shaped chart pattern, and it can act as a trend reversal or continuation pattern. Flags have parallel trendlines whereas pennants have converged trendlines. The easiest way to find a flag or pennant is to begin with the flagpole. One should always look for a straight‐line price run and price will consolidate along that run. When it does, it can take the shape of a flag or pennant. Interestingly, flags and pennants are short, no longer than three weeks. This is an arbitrary value where there is a small knot of congestion in a strong price run and once the knot unties (breaks out), price should continue on its way. Moreover, if the chart pattern does not have a flagpole, then it is not a flag or a pennant.