The Handbook of Technical Analysis + Test Bank_ The Practitioner\'s Comprehensive Guide to Technical Analysis ( PDFDrive )

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Trend Analysis


of pent‐up and unrealized profit at risk, there is a high probability that traders
and investors will rapidly exit the market at the slightest hint of bearishness.
This makes such a trend potentially more bearish at higher prices.
In Figure 5.27, we see Apple Inc. prices oscillating in a steady, rising
channel. This was subsequently followed by rapidly rising price with the mini-
mum of oscillations. As prices rise the second time toward the historical high
in Apple, they do so in a similar uptrend rate with relatively little profit taking.
Between time lines 1 and 2, we see the ATR declining as prices rise. This is a
bearish indication. We see Apple prices decline substantially thereafter. Note
that profit‐taking activity in the form of price oscillations also occurs at vari-
ous wave degrees within a trend.


  1. Relative Measure of Consolidation Size and Duration: Trend interruptions are
    more significant if:


■ (^) Price formations are of greater magnitude (taller chart patterns).
■ (^) Price formations develop over a longer period (wider chart patterns).
Larger trend interruptions normally tend to lead to a greater probability of
a reversal. In a strong uptrend, a larger head and shoulders formation would
be deemed more bearish than a smaller formation. Similarly, a larger rounding
bottom formation would be more bullish than a smaller one in a downtrend.
In short, size takes precedence over form. Moreover, the longer it takes for a
consolidation to unfold, the greater will be its disruptive power with respect
to the trend, should a reversal occur.



  1. Third Gap Exhaustion: The appearance of a third gap in a trend is also an in-
    dication of potential trend exhaustion and a possible reversal. In Figure 5.28,
    we observe the prices of the SPDR Industrial Average ETF making a top after


figure  5.27 Quality of Trend‐Based Oscillations Impacting on the Persistence of
Existing Trends on the Daily Chart of Apple Inc.
Courtesy of Stockcharts.com
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