The megaphone pattern is another chart pattern used for technical analysis. This is one of my favorite patterns because there is usually a lot of volatility when you spot it in the wild, and volatility equals opportunity in the trading world. This pattern is famous for its “broadening formation.” The price action also warns of the increased risk ahead. The megaphone chart pattern provides unique entries and exits off different sides of its structure.
What Is a Megaphone Pattern?
A megaphone pattern consists of many candlesticks forming a big, sloping megaphone-shaped pattern. This can be a bullish or bearish pattern, depending on whether it moves upwards or downwards. One thing is certain: the megaphone pattern doesn’t last forever and can explode upwards or downwards out of the structure at any point, but typically after the bottom or top trend lines have been tested five to eight times.
Megaphone patterns are also known as broadening formations due to their formation. During periods of high volatility, stocks can exhibit significant movement without clearly indicating a direction.
Hence, the formation of a megaphone. It achieves higher highs and lower lows simultaneously. Typically, a stock will only make one or the other because it’s choosing a direction. When discussing a bullish trend, everyone is used to talking about higher highs and higher lows.
Or lower lows and lower highs when discussing a bearish trend…
However, with a megaphone pattern, you get both the higher highs and lower lows! There needs to be a clear trend (except within the megaphone). Trend lines are an important part of this pattern, and you’ll need to take care of them. Carefully connect your peaks and valleys on both sides to find the price action.
Broadening Formation
Did you know that megaphone patterns are seen as a bearish pattern? You may wonder why it’s bearish if it’s a reverse symmetrical triangle. Symmetrical triangles are neutral.
If you’re a long-term or trend trader, then the broadening formation is a bearish pattern for you. There’s so much volatility without a clear direction. This, however, is great news for day and swing traders.
Day trading and swing trading are all about capitalizing on volatility. At the same time, long-term investors or trend traders want to trade in a single direction.
Since this is a volatile pattern, you want to buy around the trend lines. Depending on your trading style, it’s best to go long when the market hits angular support. Go short when it’s hitting angular resistance. Be prepared to cover because megaphones can break out to the upside, freeing from the price structure (trend lines).
Pivot Levels
Please remember the key pivot levels the stock has produced on the chart, and make sure you’re skilled at connecting the dots. If not, it could end up resembling a triangle pattern. That could change the way you trade. Remember, megaphones can form in any time frame, and sometimes there is another pattern within a pattern. (For example, check the daily, weekly, and hourly charts before making an intraday chart on a 5-minute chart.
A broadening formation forms when you use the trend lines to connect the higher highs and lower lows. The resulting picture shows a widening pattern. In essence, megaphone patterns look like a reverse symmetrical triangle.
In bull markets (characterized by weekly and monthly bullish trends), downward megaphones on 60-minute and 4-hour time frames can lead to epic bullish reversals. Take the chart of $SPX, for example. You can see on this 60-minute chart how well the downward megaphone structure has emerged.
Price continues testing the top of the megaphone more often than the lower side. Why? The bears are losing strength! Why? There are many reasons for this, but the trend is the most significant one. Bears know how STRONG that 50-day moving average is. As price tests, it (purple line) bears look to close their short. Bulls look to buy the dip!
Elections and Earnings
Elections are a big factor in the formation of a megaphone stock pattern. Uncertainty, in general, can significantly impact the development of this pattern.
Why, you may ask? The election of a specific person can change the course of a nation. That tends to affect the market. So, while the market is uncertain about the direction of the political climate, it’s fluctuating between being bullish and bearish.
Earnings season is another large factor in the forming of a megaphone pattern. Companies reporting their earnings can and will affect a stock.
Good earnings as well as bad earnings cause different reactions. Traders are well aware of how optimism and pessimism affect the stock market. Those reactions form patterns, such as a broadening formation.
Megaphone Pattern Trading Strategy
- Watch for a megaphone pattern to form downwards by connecting two to three sloping peaks and valleys (lower highs and lower lows).
- Watch for a megaphone pattern to form upwards by connecting two to three rising peaks and valleys (higher highs and higher lows).
- Connect the peaks and valleys via trend lines.
- Watch for buy areas when the price hits lower trend lines.
- Watch for short areas when the price rejects upper trend lines.
Megaphone Pattern Example
Megaphone Pattern Failure
Megaphone patterns can fail, depending on what price action does near the support and resistance pivot levels. If a trader is bullish and purchases near a support pivot level, and the price subsequently drops below that level, then the megaphone pattern could indicate a bullish failure.
The inverse can also be true. If a trader is bearish and takes a short position near a resistance pivot level, and the price rises above that level, then the megaphone pattern could be a bearish failure.
Final Thoughts on Megaphone Patterns
The megaphone can also be found on the downside. This pattern will develop during both periods of fear and greed on the charts. The Coronavirus scare spooked investors in the market and caused the price action to drop significantly. Always extend your trend lines out to the future!
Megaphone patterns are most successful for day and swing traders. However, long-term investors can use it as a signal to shore up their investments. Just as with any trading style, it’s essential to study and understand the various patterns and their meanings.
Open a paper trading account and practice trading them. As a result, you’ll get good at drawing trend lines and connecting the dots to find the different patterns, which is a very important part of trading.
Remember, the megaphone chart pattern is just one of many patterns within patterns, and you should learn as many patterns as you can to be a successful trader. Use proper risk management techniques when trading megaphone patterns.
Frequently Asked Questions
A broadening formation is also known as a megaphone pattern. Megaphone patterns begin to form when the market exhibits a higher risk over a longer period of time.
A megaphone pattern can be bullish or bearish. It's bullish as it rises in an uptrend channel and bearish when it's in a downtrend channel. Watch for price action as it hits the upper and lower channels. The big thing to look out for is the trend outside of the megaphone.
Traders typically look to take bullish entries on the support pivot levels on megaphone patterns. They take short positions when the price rejects the resistance pivot levels.
