the hAnDbook of technIcAl AnAlysIsfigure 14.6 Intrinsic Sentiment Diminished by Extrinsic Factors.
confident in participating in the last rising three pattern breakout, even though it
is essentially still a bullish pattern. It is now regarded as less bullish.
In our example above, the bullish candlestick formation was affected by ex-
ternal factors such as:
Location: The last rising three formation was located near prior resistance. This
contributed to the reduction in the degree of bullishness.
Overextension: The combination of being in a state of divergence and being in
proximity with a significant prior resistance level puts prices in an overbought
state, which is potentially bearish.
Relative Proportionality: The gradual decrease in candlestick ranges relative to
the preceding candlestick ranges is an indication of diminishing bullishness
within the uptrend. This can clearly be seen from the falling ATR values.
Prior Activity: The last rising three formations were preceded by a weakening and
tapering trend. Prices are not rising as fast and are in fact gradually slowing down.
Hence we see that external sentiment influences the degree of intrinsic bullish-
ness and bearishness. Figure 14.7 shows the converse of the price action seen in
the previous example. In this example, the external or extrinsic factors actually
augment the degree of bullishness that is intrinsic in the rising three pattern. We
say that the intrinsic and extrinsic sentiment is in agreement.
Hence, in short:
■ (^) If intrinsic and extrinsic sentiment bias are in agreement, the degree of bullish-
ness or bearishness associated with the candlestick or pattern is augmented.
■ (^) If intrinsic and extrinsic sentiment bias are not in agreement, the degree of bull-
ishness or bearishness associated with the candlestick or pattern is diminished.