Market Phase Analysis
bottoms. The reason is obvious. The market, when expressing indecision, rest,
or exhaustion, usually consolidates either by ranging or making relatively small
corrective moves before resuming the existing trend or making a full‐blown rever-
sal. Therefore, a chart pattern is usually regarded as a consolidation pattern if it:■ (^) Unfolds within a relatively confined and well defined price range
■ (^) Lacks any significant trend component
Although V tops and V bottoms are reversal patterns that occur more frequently
during distributions than accumulations, both of these patterns are not normally
regarded as consolidation since they do not unfold within a relatively confined and
well‐defined price range nor do they lack any significant trend component.
As we will see in Chapter 13, chart patterns have both intrinsic and extrinsic
bullish and bearish bias. Extrinsic bias may also be referred to as location‐based
sentiment. Intrinsic bias is the inherent bullish or bearish sentiment associated
with a chart pattern that is independent of location and where sentiment is strictly
based on the nature of the pattern. When extrinsic and intrinsic biases are in
alignment, distributions and accumulations have a greater potential for reversals,
making more reliable tops and bottoms in the market respectively. As for trends,
when intrinsic bias is in alignment with the directionality of the trend, i.e., the
trend sentiment, the potential for a continuation is usually greater.
For example, an ascending triangle is intrinsically bullish, that is, it has a bull-
ish bias. Regardless of where this pattern occurs with respect to past price action,
it will always be inherently a bullish indication. If this bullish pattern is found at
the price level of some historically significant market top, we say that it is extrinsi-
cally bearish, that is, the pattern is located at a significant resistance. However, if
this pattern occurs at the price level of a historically significant market bottom,
we say that this pattern is both intrinsically and extrinsically bullish. When the
intrinsic and extrinsic biases are in agreement or aligned, the tendency for a rever-
sal is potentially greater. If the ascending triangle occurs during an uptrend, and
is not in proximity to any significant top or bottom in the market, the chances for
a continuation are also greater as the intrinsic bias is in agreement with the direc-
tionality of price, that is, a bullish pattern occurring in a bullish trend.
Some chart patterns, like symmetrical triangles and horizontal channels, are
essentially intrinsically neutral chart patterns with no obvious bias in sentiment.
Some authors and practitioners classify them as continuation patterns whereas
others refer to them as reversal patterns. The only determining factor as to wheth-
er these patterns represent reversals or continuations must therefore lie beyond
the pattern itself, that is, sentiment that is dependent on factors that are external
or extrinsic to the pattern, like the:
■ (^) Direction of the preceding trend
■ (^) Location with respect to historical extremes in price
■ (^) Location with respect to the phase of an underlying market cycle
■ (^) Location with respect to other supportive and resistive overlay barriers to price
■ (^) Bullish or bearish divergent formations