THE HAnDbook of TECHniCAl AnAlysisspan or horizon. Practitioners frequently tune indicator and oscillator lookback
periods to one half the dominant cycle period in order to track the underlying
market activity more accurately and effectively.
Price cycles may also be used to confirm trendline retests and breakouts, chart
patterns, bar and candlestick patterns, and other indicator barriers. For example,
in Figure 20.4, we observe a larger wave cycle making peaks and troughs. All
wave cycles are comprised of smaller wave cycles, or subwaves. Assuming that the
cycle length remains consistent, a trader will be able to time a trendline breakout
at a projected peak or trough. We may refer to these cycle‐based trendline break-
outs as bullish or bearish reversal trendlines. Reversal trendlines associated with
troughs are referred to as bullish reversal trendlines and those associated with
peaks are referred to as bearish reversal trendlines.
In Figure 20.5 we observe a price cycle being used to confirm bearish and
bullish candlestick patterns. A bearish pattern occurring at a projected cycle peak
is more reliable than a bearish pattern occurring at a cycle midpoint or trough.
Similarly, a bullish pattern occurring at a projected cycle trough is more reliable
than a bullish pattern occurring at a cycle midpoint or peak.
In Figure 20.6 we observe a price cycle being used to confirm an uptrend line
support. An uptrend line is drawn based on Points 1 and 2. An uptrend line retest
figurE 20.4 Reversal Trendlines.
figurE 20.5 Bearish Patterns and Formations at Cycle Peaks.