Some conclusions will be drawn as to what ismost likely tosvork and why. _
: william L, Jiler, How Charts Are Used in Commodity Price Forecasting (Commodity Research Publications, New
York, 1977). 
24 CHARTING
FINDING CONSISTENT PATTERNS
A price chart is often considered a representation of human behavior. The goal of anychart analyst is to find consistent, reliable, and logical patterns that predict price move-ment. In the classic approaches to charting, there are consolidation forms, trend chan-nels, top-and-bottom formations, and a multitude of other patterns that can only becreated by the repeated action of large groups of people in similar circumstances or withsimilar objectives. As of this date, quantitative studies relating the psychology of behaviorto the reliability of chart formations have not been reliable. Traditional trading techniquesfound in the most popular stocks and commodities literature may themselves be thecause of the repeated patterns. Novice speculators approach the problem with greatenthusiasm and often some rigidity in an effort to stick to the rules. They will sell doubleand triple tops, buy breakouts, and generally do everything to propagate the standard for-mations. In that sense, it is wise to know the most popular and well-read techniques andact accordingly.
Speculators have many habits which, taken as a whole, can be used to interpret chartsand help trading. The typical screen trader (not on the exchange floor) will place an orderat an even number, from 5¢ to $1.00 per bushel in the grains, 10 to 50 points in otherproducts. This pattern far outweighs the number of orders entering the market to buy atodd numbers, for example the S&P at 863.50 rather than 863.35 or bonds at 105 16/32instead of 105 19/32. The public is also known to enter into the bull markets always at thewrong time. When the major media, such as television news, syndicated newspapers, andradio, carry stories of outrageous prices in cattle, sugar, or coffee, the public enters in whatW.D. Gann calls the grand rush, causing the final runaway move before the collapse; thisbehavior is easily identifiable on a chart. Gann also talks of lost motion, the effect ofmomentum that carries prices slightly past its goal. A common notion of the professionaltrader who is close to the market is that a large move may carry 10% over its objective. Adownward swing in the U.S. dollarJapanese yen from 1.2000 to a support level of 1.1000could overshoot the bottom by .0100 without being considered significant.
The behavioral aspects of prices appear rational. In the great bull markets, therepeated price patterns and variations from chance movement are indications of the effectsof mass psychology. The greatest single source of information on this topic is Mackay’sExtraordinary Popular Delusions and the Madness of Crowds, originally published in1841.7 In the preface to the edition of 1852 the author says:
   
We find that whole communities suddenly fix their minds on one object, and gomad in its pursuit; that millions of people become simultaneously impressed withone delusion. .
In 1975, sugar was being rationed in supermarkets at the highest price ever known.The public was so concerned that there would not be enough at any price that they wouldbuy (and horde) as much as possible. This extreme case of public demand coincided withthe peak prices, and shortly afterward the public found itself with an abundant supply ofhigh-priced sugar in a rapidly declining market. The world stock market are often the tar-get of acts of mass psychology. Many have taken their turn reaching incredible héights, onlyto drop suddenly at a time when buyers are most confident, to start the long climb upagain. It should not be difficult to understand why contrary thinking has developed.
Charting is a broad topic taken to great detail; the chart paper itself and its scaling aresources of controversy. A standard bar chart (or line chart) representing highs and lows canbe plotted for daily, weekly, or monthly intervals to smooth out the price movement overtime. The use of large increments representing price levels will reduce the volatile appear-
7 Reprinted in 1995 by John Wiley & Sons, Inc.
INTERPRETING THE BAR"CHART 215
ance of price fluctuations. Bar charts have been drawn on logarithmic and exponentialscales,} where the significance of greater volatility at higher price levels is put into proportionwith the quieter movement in the low ranges by using percentage changes. Each variationgives the chartist a unique representation of price action, The shape of the box and its ratioof heightAvidth will alter subsequent interpretations based on angles. Standard techniquesapplied to bar graphs, pointand-figure charts, and other representations use support anresistance trendlines, frequently measured at 45-degree angles (and at various other anglesin more complex theories). Selection of the charting paper may have a major effect on theresults. This chapter will use daily price charts and square boxes unless otherwise note
It may be a concern to today’s chartist that the principles and rules that govern chareinterpretations were based on the early stock market, using averages instead of individualcontracts. This will be discussed in the next section. For now, refer to Edwards and Magee,who said that the similarity of an organized exchange trading, “anything whose marketvalue is determined solely by the free interplay of supply and demand,” will form the samegraphic representation. They continued to say that the aims and psychology of specu atorsin either a stock or commodity environment would be essentially the same; the effect opostwar government regulations have caused a “more orderly” market in which these samecharting techniques can be used.‘
INTERPRETING THE BAR CHART
art, also called the line chart, became known through the theories of Charles H.Dowaho expressed them in the editorials of the Wall Street Journal. Dow first formulatedhis ideas in 1897 when he created the stock averages for the purpose of evaluating emovements of stock groups. After Dow’s death in 1902, William P. Hamilton succeeded imand continued the development of his work into the theory that is known today. ThoseScho have used charts extensively and understand their weak and strong points might beinterested in just how far our acceptance has come. In the 1920s, a New York newspaperwas reported to have written:
One leading banker deplores the growing use of charts by professional svocktraders and customers’ men, who, he says, are causing unwarranted market de-clines by purely mechanical interpretation of a meaningless set of lines. It is im.possible, he contends, to figure values by plotting prices actually based on supplyand demand; but, he adds, if too many persons play with the same set of chartsthey tend to create the very unbalanced supply and demand which upsets mar! ettrends. In his opinion, all charts should be confiscated, piled at the intersection 0
Broad and Wall and burned with much shouting and rejoicing,
is same newspaper may have repeated this idea applied to program trading after thestock marker plunge! wn October 1987. Nevertheless, charting has become part of ne fran’cial industry, whether the analyst is interested in the fundamentals of supply an le mandor pure price movement. The earliest authoritative works on chart analysis ae pee a tofprint, but the essential material has been recounted in newer publications. 1s owever, 4copy should cross your path, read the original Dow Theory by Robert Rhea most of allread Richard W. Schabacker’s outstanding work Stock Market Theory and rac tee, whichis probably the basis for most subsequent texts on the use of the stock market for i
5 RAW, Schabacker, Stock Market Theory and Practice (Forbes, New York, 1930, pp. 595-600). s4 Robert D, Edwards and John Magee, Technical Analysis of Stock Trends (Gobn Magee, Springfield, MA, 1948,Chapter 16). -
5 Richard D. Wyckoff, Stock Market Technique, Number One (Wyckoff, New York, 1933, p. 105).
6 Robert Rhea, Dow Theory (Vail-Ballou, Binghamton, NY, 1932). 
- 216 CHARTING
ment or speculation. Thg most available book that is both comprehensive and well writtenis Technical Analysis of Stock Trends by Robert D. Edwards and John Magee. It is confinedentirely to chart analysis with related management implications and a small section oncommodities. For the reader who prefers concise information with few examples, themonograph by WL. Jiler, Forecasting Commodity Prices with Vertical Line Charts, and acomplementary piece, Volume and Open Interest, A Key to Commodity Price Forecasting,can still be found.” A valuable recent addition is Jack Schwager's, Schwager on Futures:Technical Analysis (Wiley, 1996), the first of a three-volume set.
The Dow Theory
In its basic form, the Dow theory is still the foundation of chart interpretation and appliesequally to stocks, financial markets, commodities, and the wide variety of vehicles used totrade them. Its major premise is that averages remove a large amount of extraneous pricemotion; therefore, Dow’s original work applied exclusively to averages and not to individ-ual stocks, In fact, Dow’s Industrial, Utility, and Transportation averages have survived thetest of time. The difficulty with interpreting stock movement is in the thinness of a specificissue especially in the early part of the twentieth century; its fixed number of shares andlight volume made the movement of one stock an unreliable indicator of an economicturn. Taken in total, it would be improbable to move the average by the manipulation of asingle issue; hence, the averages become the subject of analysis. Commodities, especiallythe financial and index markets, differ from stocks in their enormous volume, as demon-strated by the Eurodollars, which can trade exceptionally high volume with only the slight-est price movement. In futures, trading can be limited to one primary contract with littledistortion because of constant massive arbitrage between futures and cash, and betweenone bank and another, especially in the interest rate and currency markets. The possibilityof one trader influencing the U.S. bond market (other than the Chairman of the FederalReserve) for more than a few seconds is remote to the point of no concern. When workingin financial markets a single product is often given the same significance as a sector in thestock market when constructing a portfolio or index, yet in the footsteps of Dow, a groupof international interest rates, with similar maturities, or a U.S. dollar index, can still be avaluable substitute for a single market. -
‘The Dow theory defines price motion, as represented by the average, in three distinctprimary, secondary, and minor trends. These elements have often been compared with thetide, the wave, and the ripple. The primary trend denotes the main move that exceeds 20%of the original price; the secondary trend is an adjustment or correction, and the minormovements are day-to-day fluctuations. The theory emphasizes the main move. As Angassaid: “Be simple. Take the grand view.” It is easier to identify the dominant trend than toworry about every change in direction.
Accumulation and distribution are the beginning phases of a bull or bear market.Accumulation is the period in which the insiders begin to acquire a long position in antic-ipation of a bull move. In charting, this is traditionally seen as a wide formation at a lowprice with increasing open interest and erratie peaks in volume representing large pur-chases. The distribution phrase serves the same function for anticipated bear moves.
A unique part of the original Dow theory that prevents it from being applied to com-modities markets is the principle of confirmation, requiring that a signal be produced bymore than one average. There has been some criticism with regard to the significance of anindustrial group being confirmed by a rail, but the concept seems sound. If the purpose of
    
 
* Two other works worth studying are Gerald Appel, Winning Market Systems: 83 Ways to Beat the Market (Sig:nalert, Great Neck, NY, 1974), and Gerald Appel and Martin E. Zweig, New Directions in Technical Analysis (Sig-nalert, Great Neck, NY, 1976).
217CHART FORMATIONS”
nds in the economy, it is unlikely that the average ofd the other group moving down in a well-definedhe same way, one would not expect the price of
decrease in absolute terms. A period of inflationany items varying from the total pattern
the Dow theory is to identify major tre:one stock group would be going up aninflationary or deflationary period. In dcorn to increase and the price of wheat to deershould uniformly affect stocks and commodities;id be explained on an individual basis.sone relationship of the number of shares or contracts traded to the development of aprice move is characterized by saying that “volume expands with the trend. Whether a bullor bear market, activity increases as the trend becomes clear. In futures, the open interesthas been treated in the same manner, with increased open interest especially during thelation and distribution phases, a sign of a new move forming. , ;ace the Dow theory has other points that have been incorporated into chart interpreta-tion, The exclusive use of closing prices is important for two reasons: (1) they are mostclosely followed by the typical speculator, and (2) they soo the chects of any Posi tionsi rt and resistance line:taken by floor traders who are day-trading. Suppo ;asa substinate for the secondary move, which may have been difficult to define. Lastly thetheory expressed a trading philosophy by stating that a trend should be assumeintact until a reversal occurred.
CHART FORMATIONS esi ight li i i ively. They can be clas-alysis applies straight lines and geometric formations extensively. They canShea into broader groups of trendlines and channels, accumulation and distibusion, andother patterns. In addition, chart formations can apply to major or minor price changesand to different time frames.
Trendlines -
‘The trendline remains the most populcan be any of the following: sorizonatine is drawn to connect the bottom points of a price move. A jorizon CoalAer ine i Seely ‘common and represents a firm price level that has withheldmarket penetration. It may be the most significant of all chart lines. omahe price peaks of a sustained move, or a horizontaled level that resists upward movement. Resistanceassociated with higher
ar and readily recognized too! of chart analysis. It
A resistance line is drawn across t]resistance line representing the fix |lines are not normally as clear as support lines because they areili i ic pri ment.
volatility, which causes erratic price move! ; , ;‘channel is the area between parallel support and resistance lines that serves to contain a sustained price move. When the support and resistance lines are relatively hortzontal, or sideways, the channel is called a trading range.
a rising line drawn across the lowest points of a
in bA Bali oan ie oy nesistanice ne is a declining line drawn across. the highest
price move, and a bearish resistance lipeaks of a price move.
Formations for Accumulation and Distribution
i i ii i ification of tops and bottoms. BecauseMoS een over fay soe periods, they have been called accumula-
ny of these formations unfold over fairly long 3 peen cal nlaHon at the bottom, where typical stock investors slowly buy into their position, and distbution at the top, where the invested positions are sold off. The most popu
formations are: 
218 CHARTING
 
Head-and-shoulders bottom and top
Common rounded upward or downward turn
Triangular bottom and top of an ascending, descending, or symmetric shape, such asa triangle, flag, or pennant
Ascending bottom and top
“V*-bottom (a “V”-top is usually referred to as a spike)
Double bottom and top
Complex bottom and top, including a triple bottom or top, or a combination of otherformations
Broadening bottom and top
Most of these patterns are self-explanatory and are covered in detail in many booksdevoted entirely to the topic. In addition to the classic by Edwards and Magee and themonograph by Jiler, the reader can find considerable value in John Murphy’s “Bar Chart-ing” in Kaufman, Handbook of Futures Markets,* and more recently Schwager on Futures:Technical Analysis.? Instead of giving examples of these formations, we will look at themin the context of trading rules.
 
In addition to the broader patterns noted above, there are specific situations of short dura-tion that have been noted by the chartist, including:
GapsSpikesReversal daysTheust daysCups and caps
These will be covered in the following sections.
Major and Minor Formations
Throughout the study of charting, it is important to remember that the same patterns willappear in short- as well as long-term charts. An upward trendline can be drawn across thebottom of a price move that only began last week; it can represent a sustained 3-year trendin the financial markets, or a 6-month move in coffee. In general, the longer the time inter-val, the more significant the formation. Contract highs and lows, well-defined tradingranges, trendlines using weekly charts, and head-and-shoulder formations are carefullywatched by traders. Obscure patterns and new formations are not of interest to mostchartists, and without the support of the traders, conclusions drawn from those formationshave no substance. The basic charting course also includes interpretation of volume andopen interest and a variety of rules for using the formations.
 
BASIC TRADING RULES
The simplest formations to recognize are the most commonly used and most important:horizontal support and resistance lines, bullish and bearish support and resistance lines,and channels, Proper use of these basic lines is essential for identifying the overall direc-
"arthur Sklarew, Techniques of a Professional Commodity Chart Analyst (Commodity Research Bureau, New‘York, 1980), and John Murphy, “Bar Charting” in Handbook of Futures Markets, Perry J. Kaufman (ed.) johnWiley & Sons, New York, 1984).
° Jack D. Schwager, Schwager on Futures: Technical Analysis John Wiley & Sons, New York, 1996).
BASIC TRADING RULES 219
tion of the market and how it gets there. An understanding of these patterns will be help-ful to computer-oriented analysts, many of whose techniques have been modeled afterchart formation. More complex formations are likely to enhance good performance butcannot compensate for poor trend identification.
Once the support and resistance lines have been drawn, a price penetration of thoselines creates the basic trend signal (Figure 9-1a). The bullish support line defines the upwardtrend, and the bearish resistance line denotes the downward one. For long-term charts andmajor trends this is often sufficient, but frequent small penetrations of both long- and shortterm trendlines can be avoided by placing a band around both lines (Figure 9-16). A shortsignal occurs when both the trendline and the band have been penetrated. Because of thebasic charting rule—“Once broken, a resistance level becomes a support level and a supportlevel becomes a resistance level”—the original trendline (or a trendline plus and minus aband) can be used as a stop-loss. If prices penetrate the stop-loss point, then return to theoriginal formation; there has been a false breakout and the original trendlines are still valid.
A Classic Difemma
‘The use of bands around a trendline is more popular than the use of the trendline alonebecause price movement is not clean. Larger bands produce more reliable trend signals;eeeFIGURE 9-1 Basic trading rules. (a) Line signals. (b) Bands.
                             
Miter” Bearish resistanceClose outtong position
and enternew short,
    
Bullish support Close out
short positionand enter‘new long
(a)
3. Close out if prices move
back above trendline _SNe
2. Self on pullback to trendiine
        
1. Selt on initial breakand penetration
Trendiine(b)
  
= CHARTING
however, they need more time to generate a signal resulting in smaller profits and largerrisk. This produces a classic dilemma for the trader, one that cannot be resolved except bypersonal choice.
Experienced traders often wait for the first pullback after the breakout before enteringtheir position. This technique results in a higher percentage of profitable trades. The posi-tion is set when the new direction is confirmed following a test of the old support or resis-tance levels (and the theoretic stop-loss). If the test fails, which frequently occurs, the tradeis not entered and a loss is prevented (Figure 9-14). Unfortunately, most of the biggestprofits result from breakouts that never pull back. Catching only one of these breakoutscan compensate for all the small losses due to false signals. Many professional traders maybe steady winners, but they do not often profit from the biggest moves
Identifying Direction from Consolidation Patterns
It is said that markets move sideways about 80% of the time, which means that directionalbreakouts do not occur often, or that most breakouts are false and fail to identify a newmarket direction. Classic accumulation and distribution formations, which occur at long-term lows and highs, attempt to find evolving changes in market sentiment. Because theseformations occur only at extremes, and may extend for a long time, they represent themost obvious consolidation of price movement. Even a rounded, or saucer, bottom mayhave a number of false starts; it may seem to turn up in a uniform pattern, then fall backand begin another slow move up. In the long run the pattern looks as if it is a somewhatirregular but extended rounded bottom; however, using this pattern to enter a trade in atimely fashion can be disappointing and has resulted in the safe but conservative techniqueof averaging in.
Most other consolidation formations are best viewed in the same way as a simply hor-izontal sideways pattern, bounded above by a resistance line and below by a support line.If this pattern occurs at reasonably low prices, we can eventually expect a breakout upwardwhen the fundamentals change. Occasionally prices seem to become less volatile withinthe sideways pattern, and chartists take this opportunity to redefine the support and resis-tance levels so that they are narrower. Breakouts based on these more sensitive lines tend
to be less reliable because they represent a temporary quiet period inside the normal levelof market noise.
Market Noise
All markets have a normal level of noise. The stock index markets have the greatest amountof irregular movement due to its extensive participation, the high level of anticipation builtinto the prices, and because it is an index. This is contrasted to short-term interest rates,which have large participation but little anticipation and a strong tie to the underlying cashmarket. In comparison, long-term rates allow for greater movement away from the cashmarket. The normal level of noise can be seen as the consistent daily or weekly tradingrange on a chart of the DJIA or S&P. When volatility declines below the normal level ofnoise, the market is experiencing short-term inactivity. An increase in volatility back to nor-mal levels of noise should not be confused with a breakout.
This same situation can be applied to a triangular formation, which has traditionallybeen interpreted as a pause within a trend. This pattern often follows a fast rise and rep-resents a short period of declining volatility. If volatility declines in a consistent fashion, itappears as a triangle; however, if the point of the triangle is smaller than the normal levelof market noise, then a breakout from this point is likely to restore price movement to arange typical of noise, resulting in a flag or pennant formation. Both of these latter patternshave uniform height that can include a normal level of noise.
221TOPS AND BOTTOMS -
TOPS AND BOTTOMS
Most of the formations importantof the support or resistance linesitable trades occur on breakouts frot afersbottom formations, as well as one that o! P tat contract lows. Fortunes have been made by applying patience,and the following plan: :1, Find a market with a long consolidating base and low volatility Goth Bacar it: i i t). When evaluating interest rates,
should also have increasing open interest). W st Fates,
yield rather than the price, and avoid currencies that have no base price; that is, they
i instead have a point of equilibrium. _have no level considered low, but ins cnt of ea so Hau
2. Buy whenever there is a test of its major supportdate all positions on a new, low price
3. After the initial breakout, buy again when prices pull ba
line (now a support level). Close out all positions if prices p
solidation area, and start again at step 2. / } _.
4 Boy Whenever there is a major price adjustment in the bull move. These adj
ecnts, oF pullbacks, will become shorter and less frequent as the move develops.
They will usually be proportional to current volatility or the size of the price as mea
red from the original breakout. | -Liguidate all positions at a prior major resistance point,breaking of a major bullish support line.done with a relatively small amount of capital andrisk. The closer the price comes to. pat SOOT ae Th oP joccion fone ne oe; however, fewer positions can be placed. In hi q ofe ‘ roditymater (Harper & Row), Stanley Kroll discussed “The Copper Caper= How Were Going °Make a Million,” using a similar technique for building positions. It can be done,requires patience, planning, and capital. The opportunities continue 19 © ere armen‘This example of patiently building a large position does not usually a pI fo bear markets. Although there is a great deal of money to be made on the short si Je of the market,rices move faster and may not permit the accumulation of a large position. rereee tionally high risk and the increased risk of false signals caused by grea F volatilityWithin consolidation areas at low levels, there is an underlying demand (or a product, thecost of production, government price support (for agricultural Prod ucts), ae ow verefulity. There is also a well-defined trendline that may have been tester ™ vr eo Ane buytender ‘will not enter a large short-sale position at an anticipated top, bat wij in the buyers who contribute to the growing, volume and open interest at a well-deh
port level.
to bar charting can be traded using a penetration of oneas a signal. The most interesting and potentially profim major top or bottom formations. The simplest otalgreat opportunities, is the extended rectanglesome available capital,
 
II back to the original resistanceenetrate back into the
a top formation, or the
y
Building positions in this way can be
Head and Shoulders
ation is the bead and shoulders, accepted as a major
The classic top and bottom form “das 2. major
i shivevetsal indicator, This pattern, well-known to chartists, appears as a left shoight shoulder (Figure 9-2). , ;aan ee dana shoulders top is developed in the folfowing manner:1. Asstrong upward breakout reaching new highs on increased volume. The move ap
ii i 1 Il move.
be the continuation of a long-term bul ; nea
2. a eeensolidation area formed with diminishing volume. This can look a aining* dcecending flag predicting an upward breakout, or a descending triangle
a downward breakout. 
222CHARTING
FIGURE 9-2 Head-and-shoulders formation.
Head
       
RightLeft shoulder
shoulder
 
3. Another upward breakout on continued reduced volume forms the head. This is thekey point of the formation. The new high is not confirmed by increased volume,
and prices fall off quickly. .
Another descending flag or triangle is formed on further reduced volume followed
by a minor breakout without increased volume. This last move forms the right
shoulder and is the third attempt at new highs for the move.
5. The lowest points of the two flags, pennants, or triangles become the neckline ofthe formation. A sale is indicated when this neckline is broken.
‘Trading Rules for Head and Shoulders
There are three approaches to tradinj ion i7 a g a head-and-shoulders top formatior iincreasing degrees of anticipation: P ‘on involving
Ja. Sell when the final dip of the right shoulder penetrates the neckline. This repre-sents the completion of the head-and-shoulders formation. Place a stop-loss justabove the entry if the trade is to be held only for a fast profit, or place the stop-lossabove the right shoulder or above the head to liquidate on new strength, allowinga longer holding period. ,
b. sell on the first rally after the neckline is broken. (Although more conservative, thejost opportunities usually outweigh the improved entry pri ’lost opportunities Pp! ry prices.) Use the same
2a. Sell when the Fight shoulder is being formed. A likely place would be when prices
ave retraced their way half of the distance to the head. A stop-lo:above the top of the head. Poss can be placed
b. Wait until the top of the right shoulder is formed and sell with a stop either above
the high of the right shoulder or above the high of the head.-
Both steps 2a and 2b allow positions to be taken well in advance of the neckline penetra-
tion with logical stop-loss points. Using the high of the h ’ iservative. 6 igh ¢ head for a protective stop is con-
3. Sell when the right part of the head is forming, with a stop-loss at about the highof the move. Although this represents a small risk, it has less chance of success. Itis for traders who prefer to find tops and are willing to suffer frequent small losses
Decne eee
TOPSAND BOTTOMS - 223
 
to do it. Even if the current prices become the head of the formation, there may benumerous small corrections that will look like absolute tops to an anxious seller.
Other Top and Bottom Formations
‘The experienced trader is most successful when prices are testing a major support or resis-tance level, usually a contract or seasonal high or low. The more often those levels aretested the clearer they become and the less likely prices will break through to a new levelwithout a change in the fundamental supply and demand factors.
Repeated tests of tops are visually clearer, but not as exact as bottoms because of theadded volatility of higher prices. The double top is a more speculative trade than succes-sive multiple tops; it is more frequent than the other formations and is the first opportu- :nity for picking the top of a bull move. It is also easy to position a stop-loss above theprevious highs. As with other chart patterns, declining volume would be a welcome con-firmation after the formation of the first top and accompanying each additional test of thetop (Figure 9-3).
‘Triple tops are frequently used as opportunities for selling. Because they are easilyseen, there is anticipation that causes the third top to look similar to a right shoulder,lower than the previous highs. Traders waiting for a near-test of the highs to enter a tradewith less risk could find themselves without any position at all. Among professionals, thefourth top is considered the final test; whichever direction prices turn at that time willdetermine the new major trend.
Double and triple bottoms also occur but are generally of lesser magnitude than tops.Because low prices can be sustained at value or cost-of production levels, it is not neces-sary for the new upward trend to begin in the near future. In most markets, the profitabil-ity associated with these bottom formations is much lower and is proportional to the lowertisk, With the exception of the financial markets, for which bottoms are really tops (peakinterest rates), double and triple bottom formations are most often found in the currencyand cattle markets.
‘When using top formations, we must consider why a three- or four-peak combinationis so rare, There are two possibilities. When it is evident that the previous peaks occurredunder extreme conditions, such as a temporary supply shortage, or demand caused by anews-related item, the following tests of the high are met with active selling. This causesany attempt at an upward move to be sharply halted. The greater the conviction that therally is over, the greater the selling.
Multiple tops also fail to appear because prices simply move higher. The market doesnot see the previous tops as significant, and new buying renews the upward trend. If yousee a single, interim top on a chart, formed by a pullback within a trend, there must havebeen a potential double top when prices res