|Significant declines evolve into long bottoms
characterized by failed rallies and retesting of prior
lows. As new accumulation slowly shakes out the last
crowd of losers, a stock's character changes. Prices
push toward the top of key resistance. Short-term
relative strength improves and the chart exhibits a
series of bullish price bars with closing ticks near
their highs. Finally the issue begins a steady march
through the wall marked with past failures.
||Stocks must overcome gravity to enter new uptrends.
Value players build bases but can't supply the critical
force needed to fuel rallies. Fortunately, the momentum
crowd arrives just in time to fill this chore. As a
stock slowly rises above resistance, greed rings a loud
bell and these growth players jump in all at the same
|The appearance of a sharp breakout gap has tremendous
buy power. But the skilled trader should remain cautious
when the move lacks heavy volume. Bursts of enthusiastic
buying must draw wide attention that ignites further
price expansion. When strong volume fails to appear, the
gap may fill quickly and trap the emotional longs.
Non-gapping, high volume surges provide a comfortable
price floor similar to gaps. But support can be less
dependable, forcing a stock to swing into a new range
rather than rise quickly.
Fortunately this scenario sets up good pullback trades.
The uptrend terrain faces predictable obstacles marked
by Clear Air pockets and congestion from prior
downtrends. These barriers can force frequent dips that
mark good buying opportunities. The trader must identify
these profitable zones in advance and be ready to act.
|Gap breakouts are
more likely to rise toward higher prices
immediately than simple volume breakouts.
Waiting for a dip may be futile. Extreme crowd
enthusiasm ignites continued buying at higher
levels and market makers don't need pullbacks to
generate volume. If entry is desired, use a
trend-following strategy and manage risk with
absolute price or percentage stop loss.
As trend builds momentum, surges register on
technical indicators such as MACD and ADX. Volatility
absorbs each thrust and parabolic rallies erupt. Dips
will cease during these runaway expansion moves as price
range expands bar to bar, often culminating in a second
(continuation) gap and a final exhaustion spike.
After rapid price movement, markets need time to absorb
instability generated by that trend's momentum. They
pause to catch their breath as both volume and price
rate of change drop sharply. During this consolidation
period, new price levels undergo continuous testing for
support and resistance. To the pattern reader, this
range phenomenon reveals itself through the familiar
shapes of Flags, Pennants and Rectangles.
Relatively simple mechanics underlie the formation of
these continuation patterns. The orderly return to a
market's mean state sets the foundation for a new thrust
in the same direction. In a series of sharp trend moves,
congestion tends to alternate between simple and complex
in both time and size. Trade defensively when the prior
pattern was both short and simple. Go on the offense
after observing an extended battle in the last range.
When examining continuation patterns, traders must pay
close attention to proportionality. This visual element
will validate or nullify other predictive observations.
Constricted ranges should be proportional in both time
and size to the trends that precede them. When they take
on dimensions larger than expected from visual
examination, odds increase that the observed range
actually relates to the next trend larger in scale than
the one being viewed. This can trigger devastating trend
relativity errors, in which positions are executed based
on patterns longer or shorter than the time frame being
All patterns must be evaluated within the context of
trend relativity. The existence of any range depends
upon the time frame being analyzed. For example, a
market may print a strong bull move on the weekly chart,
a bear on the daily and a tight continuation pattern on
the 5-min bar, all at the same time. A range drawn
through one time frame does not signal similar
conditions in the other periods that particular market