Level 4 — ApplicationChart Patterns

Chart Patterns

⏱ 60 minutes50 marksprintable — key stays hidden on paper

Level 4 — Application (novel problems, no hints) Time limit: 60 minutes Total marks: 50

Question 1 — Head and Shoulders Target (10 marks)

A stock forms a classic Head and Shoulders top with the following prices:

Left shoulder peak: $148
Head peak: $162
Right shoulder peak: $150
The neckline is (approximately) horizontal, drawn through the two intervening troughs at $135.

(a) Calculate the measured-move price target once the neckline breaks. (3) (b) State the percentage decline this target implies from the neckline break point. (2) (c) The stock breaks the neckline on high volume but rallies back to $137 two days later before falling again. Name this event and explain what a trader should conclude. (3) (d) Classify this pattern as continuation or reversal and justify in one sentence. (2)

Question 2 — Triangle Breakout & Measured Move (10 marks)

An ascending triangle forms in an uptrend. The horizontal resistance sits at $80. The rising lower trendline starts at a low of$ 68 and, at the point of breakout, has risen to $76.

(a) Compute the measured-move target using the triangle's widest (base) height projected from the breakout point. (3) (b) Explain why an ascending triangle is generally read as bullish. (2) (c) The average daily volume during formation was 2.0 million shares; the breakout candle traded 1.1 million shares. Comment on the reliability of this breakout. (2) (d) Give the price level below which you would judge the breakout to have failed, and justify. (3)

Question 3 — Pattern Identification from Data (10 marks)

You are given the following swing points for four different charts. For each, name the most likely pattern and state whether it is a continuation or reversal signal.

Chart	Trend before	Swing sequence (highs/lows)
A	Down	Low 40, high 52, low 40, high 51, low 39.5
B	Up	Sharp rally to 90, then tight parallel down-slope channel 90→84 on falling volume
C	Up	High 120, low 110, high 120, low 111, high 119.5 (then falls)
D	Down	Gradual saucer-shaped base, slow curve from 30 down to 25 back to 30

(a) Identify each pattern A–D. (4) (b) For each, state continuation OR reversal. (4) (c) For Chart A, name the confirmation trigger that validates the pattern. (2)

Question 4 — Measured Moves & Cup and Handle (10 marks)

A stock forms a cup and handle. The cup's rim (breakout level) is at $200. The bottom of the cup is at$ 170. The handle pulls back modestly to $194 before breaking out.

(a) Calculate the measured-move target using cup depth projected from the breakout. (3) (b) A trader instead uses a flag on the same stock: a flagpole ran from $150 to$ 180, then a flag consolidated to $175 before breaking upward. Compute the flag's target. **(3)** (c) Compare the risk profile of entering on the cup breakout ($ 200) vs the flag breakout ( $180), assuming a stop just below each pattern's low ($ 194 handle low; $175 flag low). Which offers the better reward-to-risk if both hit their targets? (4)

Question 5 — Wedges & Reasoning (10 marks)

(a) A rising wedge forms during an existing downtrend after a bounce. State the expected breakout direction and classify it as continuation or reversal in this context. (3) (b) Contrast a symmetrical triangle with a rising wedge in terms of trendline slopes and directional bias. (3) (c) A double bottom forms with lows at $50 and$ 50.50, and the intervening peak (neckline) at $58. Calculate the measured-move target on a neckline break, and state the invalidation level. (4)

Answer keyMark scheme & solutions

Question 1 (10 marks)

(a) Pattern height = Head − Neckline = $162 −$ 135 = $27. Target = Neckline − height =$ 135 − $27 = **$ 108**. (height 1, subtraction 1, target 1) (3)

(b) Decline from break point ( $135) to target ($ 108) = $27. % =$ 27/135 × 100 = 20%. (calc 1, answer 1) (2)

(c) This is a throwback (return move / retest of the broken neckline). The neckline, formerly support, now acts as resistance. The failure to reclaim it and subsequent fall confirms the breakdown; a trader may use the retest as a lower-risk short entry. (name 1, resistance flip 1, conclusion 1) (3)

(d) Reversal — a Head and Shoulders top forms at the end of an uptrend and signals a reversal to a downtrend. (classification 1, justification 1) (2)

Question 2 (10 marks)

(a) Base (widest) height = resistance − starting low = $80 −$ 68 = $12. Target = breakout ($ 80) + $12 = **$ 92**. (height 1, projection 1, answer 1) (3)

(b) Flat resistance with rising lows shows buyers stepping in at progressively higher prices while sellers defend a fixed ceiling; demand absorbs supply until the ceiling breaks — hence bullish. (rising lows 1, absorption/bullish logic 1) (2)

(c) Breakout volume (1.1M) is below the average (2.0M). Weak volume on breakout reduces reliability and raises the risk of a false break/failure. (compares 1, conclusion 1) (2)

(d) Failure judged if price falls back **below the resistance-turned-support ( $80)**, ideally back inside the triangle / below the last higher low (~$ 76). A decisive close under $80 negates the breakout. (level 1, reason 1, refinement 1) (3)

Question 3 (10 marks)

(a) (1 each)

A: Inverse (bottom) Head and Shoulders? No — sequence is roughly equal highs 52/51 with equal lows 40/40 → Double/Triple bottom-type; with two equal lows separated by a peak in a downtrend and matching highs it is best read as a Double Bottom (lows 40, 40). Accept Double Bottom.
B: Bear Flag / Flag (tight parallel channel against prior sharp move, falling volume).
C: Triple Top (three highs ≈120, 120, 119.5).
D: Rounding Bottom (saucer).

(b) (1 each)

A: Reversal (bottoming after downtrend).
B: Continuation (flag continues prior trend — here prior sharp move was down, so bearish continuation).
C: Reversal (top after uptrend).
D: Reversal.

(c) Confirmation for Chart A (double bottom): a breakout/close above the intervening peak (neckline ≈52), ideally on rising volume. (neckline break 1, volume/close 1) (2)

Question 4 (10 marks)

(a) Cup depth = rim − bottom = $200 −$ 170 = $30. Target = breakout ($ 200) + $30 = **$ 230**. (depth 1, projection 1, answer 1) (3)

(b) Flagpole = $180 −$ 150 = $30. Flag target = breakout ($ 180) + $30 = **$ 210**. (pole 1, projection 1, answer 1) (3)

(c)

Cup: entry $200, stop$ 194 → risk = $6; reward =$ 230 − $200 =$ 30 → R:R = 30/6 = 5.0.
Flag: entry $180, stop$ 175 → risk = $5; reward =$ 210 − $180 =$ 30 → R:R = 30/5 = 6.0. The flag offers the better reward-to-risk (6.0 vs 5.0). (cup R:R 1, flag R:R 1, comparison 1, correct choice 1) (4)

Question 5 (10 marks)

(a) A rising wedge is a bearish pattern; in a downtrend it breaks downward and acts as a continuation of the downtrend. (direction down 1, bearish 1, continuation 1) (3)

(b) Symmetrical triangle: converging trendlines — one falling, one rising, roughly symmetric, neutral bias (breaks either way, usually with trend). Rising wedge: both trendlines slope up but the lower rises faster (converging upward), carrying a bearish bias regardless of prior trend. (slopes 1, sym neutral 1, wedge bearish 1) (3)

(c) Height = neckline − low = $58 −$ 50 = $8. Target = neckline ($ 58) + $8 = **$ 66**. Invalidation: a fall below the pattern lows (~$50), i.e. below the double-bottom support negates the setup. (height 1, target 1, invalidation level 1, reason 1) (4)

[
  {"claim":"Q1 H&S target = 108 and 20% decline","code":"head=162; neck=135; h=head-neck; target=neck-h; pct=h/neck*100; result=(target==108 and abs(pct-20)<1e-9)"},
  {"claim":"Q2 ascending triangle target = 92","code":"res=80; low=68; brk=80; h=res-low; target=brk+h; result=(target==92)"},
  {"claim":"Q4 cup target 230 and flag target 210","code":"cup=200-170+200; flag=(180-150)+180; result=(cup==230 and flag==210)"},
  {"claim":"Q4 R:R cup=5, flag=6, flag better","code":"cupRR=(230-200)/(200-194); flagRR=(210-180)/(180-175); result=(cupRR==5 and flagRR==6 and flagRR>cupRR)"},
  {"claim":"Q5 double bottom target = 66","code":"neck=58; low=50; h=neck-low; target=neck+h; result=(target==66)"}
]