Stocks have been making significant moves recently. Last week, small caps resumed their leadership in the post-election rally. Tesla (TSLA), the poster child of the Trump trade, has seen a remarkable 35% increase since Election Day and reached a two-year high. But it's not just about the charts; it's about the psychology behind the patterns they form. Breakouts thrive on emotions like fear and greed, and they fuel both bull and bear markets. Technical patterns not only measure prices but also measure belief.

Julius de Kempenaer's Insights on Chart Patterns

Julius de Kempenaer, the creator of Relative Rotation Graphs (RRG), recently joined Yahoo Finance's Stocks in Translation podcast and shared ways to play some of these chart patterns. He emphasized, "You want to jump on something that's [moving] in the right direction. So, it has established that strength already, and you want to piggyback on that move."

Block (SQ) - A Pandemic-Era Darling

Block (formerly Square) was a pandemic-era darling whose stock price was severely hit during the aggressive Federal Reserve interest rate-hiking cycle. It witnessed an 800% rally over a year and a half, followed by an 80% decline in 2022. While the "Magnificent Seven" megacap tech stocks and the Nasdaq Composite (^IXIC) soared in 2023 and 2024, Block struggled in a frustrating consolidation. However, recently, Block has made a strong comeback and broken out of a long-term inverse head-and-shoulders pattern.The "inverse" in this context means that the pattern (shown above) is the mirror image of a bearish head-and-shoulders top. It consists of three peaks, with the outer two "shoulders" reaching similar levels and the middle peak, or "head," rising to a higher level. Although no pattern is perfect, most technical analysis practitioners would view the left (upside-down) shoulder, which formed over the first three quarters of 2023, as an important part of the pattern. The second dip, the upside-down head, dropped lower than the first, shaking out more investors. The rightmost shoulder started in the second quarter of this year, with the price approximately matching the left shoulder. Critically, over this entire two-year period, Square never closed above the $90 baseline until last week.

Block's Breakout and Market Psychology

Block's breakout is now triggering a wave of buying, as explained by de Kempenaer using market psychology. "The people who sold short are the best drivers of the bull market because when you sold short at that previous high, you are now at a loss. So you need to cover your position." He added that many professional investors will also buy again to initiate a long position. There is a double buy at play here.Zooming in, we can see another Block chart pattern forming on a shorter, nine-month time frame.

Block (SQ) - Breaking Out of a Cup & Handle Pattern

The cup-and-handle pattern is visually simpler than the head-and-shoulders pattern. It takes on the form of a gently rounded base that resembles a smile. At the rightmost side, the handle is formed by a pause and consolidation before breaking out. In the case of Block, this relatively small handle only took about four days to complete.Many practitioners of technical analysis look for the price ranges of stocks to repeat. Block chopped around for two years in a $50 price range as it was establishing its inverse head-and-shoulder pattern. This points to an upside target of roughly $140 from the $90 breakout level, which would take it to the March 2022 interim high. This represents a 55% gain for those playing the breakout. However, given the length of the consolidation, many traders are holding out for higher levels. As an old technical analysis maxim states: "The bigger the base, the higher in space."

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