the hAnDbook of teChnICAL AnALySISthe appearance of a third gap in the uptrend. This also coincided with over-
bought conditions on the cycle‐tuned stochastic. Prices finally bottomed af-
ter the appearance of another third gap in the subsequent downtrend, which
again coincided perfectly with the cycle‐tuned stochastic at oversold.- Completion of the Average Period Range: One of the most reliable charac-
teristics of price activity lies with its average period range, with the period
being any chosen duration of observation. For example, let us assume that the
average daily range of a certain FOREX pair is 120 pips per day. This would
essentially mean that any price activity beyond this average range in either
direction prior to the completion of the trading day will be regarded as a po-
tential sign of exhaustion and a reversal may be expected. It is important to
note that these averages period ranges may also be associated with underlying
wave cycles in the market. Once the average range is breached prematurely,
the practitioner begins to look for various signs of a reversal, paying special
attention to supportive and resistive confluences. The average period range
may be obtained via either of the following approaches:
■ (^) The use of the average true range indicator (ATR) set to a reasonable look-
back period on an interval chart of interest.
■ (^) By finding the 2 standard deviation value of bar range over a certain number
of periods.
The practitioner should conduct a simple backtest to find the most reli-
able lookback period for each of the above approaches. Note that with the
latter approach, ninety percent of the period ranges will remain below the
calculated value, the breach of which represents a greater degree of overex-
tension or exhaustion.
- Overextended Price Action with Respect to an Overlay Barrier: Any price pen-
etration above an uptrending line is generally regarded as a potential sign of
figure 5.28 Third Gap Indicating Potential Exhaustion in a Trend on the Daily Chart
of SPDR DJ Industrial Average.
Courtesy of Stockcharts.com