THE HAnDbook of TECHnICAl AnAlysIssignificantly Clear and obvious Inflection points
Clusters founded on significant inflection points tend to be more reliable. Inflec-
tion points are regarded as significantly clear and obvious if:
■ (^) They are separated by a reasonable distance.
■ (^) There is no significant intervening price action that either exceeds the prices
between two inflection points or draws attention away from them.
■ (^) They are located at the end of an extended and aggressive trend.
■ (^) The price level at which they are situated has been tested multiple times.
■ (^) They coincide with projected cycle peaks and troughs.
■ (^) They coincide with projected chart pattern and money management–based
price targets.
■ (^) They coincide with psychologically important numbers.
■ (^) They coincide with significant overbought and oversold levels on the window
oscillators.
■ (^) They are supported by confirmatory volume and open interest action.
■ (^) They represent a very popular bar chart or Japanese candlestick pattern break-
out or reaction level.
■ (^) They are part of a bullish or bearish cluster of indicator overlays.
reliability of Clusters and single overlay barriers
Before proceeding any further, it is important to define what is meant by the term re-
liable. Any single overlay or price cluster, including any prior support or resistance,
is regarded as reliable if it acts as an effective barrier to price. The more it acts as a
barrier to price, the more it is considered reliable. Note that only multiple overlays
that are in proximity with each other will be regarded as a cluster. It is important to
note that the point at which multiple overlays fail to represent a cluster is somewhat
subjective and depends largely on the degree and type of filtering employed. (See
Figure 27.1.)
Figure 27.1 shows price, as indicated on the left side of the illustration, having
very little regard for the three overlay barriers, consisting of a Fibonacci 168.2
percent projection level, a prior support, and a Gann three‐eighths support level.
The price cluster on the right side of the illustration is potentially more reliable,
as it provides a more effective barrier to price. The illustration on the left depicts
price breaching the cluster with little respect for the individual barrier levels, and
is therefore regarded as less reliable.
Figure 27.2 depicts two uptrend lines with the one on the left offering very
little support (and resistance) to price and therefore considered a less‐reliable up-
trend line. Similarly, Figure 27.3 depicts two fixed‐percentage moving average
bands, with the band on the left offering very little support or resistance to price
and therefore considered a less‐reliable overlay.
Note that only single overlays and price clusters act as potential barri-
ers to price. Single time overlays and clusters cannot act as barriers to price.
They only indicate potential activity in price, often with little or no indication
about the: