As with the mineral found in the earth, diamonds are rare and precious, and instances of this pattern can be some of the most powerful predictors of price movement in the realm of technical analysis. This chapter is rather short, because there are not many good examples of diamond patterns to present, but the four bearish and two bullish charts shown will give you a good idea what to seek.
DEFINITION OF THE PATTERN
A diamond pattern is formed on the left side by a series of higher highs and lower lows and, once past the midpoint, a series of lower highs and higher lows. The security loses its ability to trend (becoming increasingly wide in its range) and then begins tightening its range up again, suggesting that it is losing its moorings. This inability to sustain a clear trend is why this kind of pattern often accompanies a reversal, and it is more common for the reversal to happen at a market top instead of a market bottom.
One way to think of a diamond pattern is as a head-and-shoulder pattern with a V-shaped neckline (for a top) or an inverted head and shoulder with an A-shaped neckline (for a bottom). Although most patterns require a discerning eye that has been trained by experience, diamonds require an even more skillful eye, since they are rather difficult to spot, particularly without the benefit of significant hindsight.
Diamonds that are sloppily formed generally aren't worth your attention. As with other patterns, the cleaner the pattern is and the ...