. (a) Line signals. (b) Bands.
 
                                 
‘sition Bearish resistanceClose outJong positionand enter
new short
  
Bullish support Close outshort position
and enter
new long
(a)
3. Close out if prices move
back above trendline _LY Neeser
2. Sell on pullback to trendline
      
1. Self on initial breakand penetration
Trendline
(b)220 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 9-16). 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 inatimely 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 tendto 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.TOPSAND BOTTOMS - 221eee
TOPS AND BOTTOMS
Most of the formations important to bar charting can be traded using a penetration of oneof the support or resistance lines as a signal. The most interesting and potentially profitable trades occur on breakouts from major top or bottom formations. The simplest of allbottom formations, as well as one that offers great opportunities, is the extended rectangleat contract lows. Fortunes have been made by applying patience, some available capital,and the following plan:
1. Find a market with a long consolidating base and low volatility (with futures itshould also have increasing open interest). When evaluating interest rates, use theyield rather than the price, and avoid currencies that have no base price; that is, theyhave no level considered low, but instead have a point of equilibrium.
2. Buy whenever there is a test of its major support level, placing a stop-loss to liqui-date all positions on a new, low price.
3. After the initial breakout, buy again when prices pull back to the original resistanceline (now a support level). Close out all positions if prices penetrate back into theconsolidation area, and start again at step 2.
4, Buy whenever there is a major price adjustment in the bull move. These adjust-ments, or 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-sured from the original breakout.
5. Liquidate all positions at a prior major resistance point, a top formation, or thebreaking of a major bullish support line.
Building positions in this way can be done with a relatively small amount of capital andrisk. The closer the price comes to major support, the shorter the distance from the stop-loss; however, fewer positions can be placed. In his book, The Professional CommodityTrader (Harper & Row), Stanley Kroll discussed “The Copper Caper—How We're Going toMake a Million,” using a similar technique for building positions. It can be done, but itrequires patience, planning, and capital. The opportunities continue to be there.
This example of patiently building a large position does not usually apply to bear mar-kets. Although there is a great deal of money to be made on the short side of the market,prices move faster and may not permit the accumulation of a large position. There is alsoexceptionally high risk and the increased risk of false signals caused by greater volatility.Within consolidation areas at low levels, there is an underlying demand for a product, thecost of production, government price support (for agricultural products), and low volatil-ity. There is also a well-defined trendline that may have been tested many times. A carefultrader will not enter a large short-sale position at an anticipated top, but will join the buy-ers who contribute to the growing volume and open interest at a well-defined major sup-port level. 5 -
Head and Shoulders
The classic top and bottom formation is the head and shoulders, accepted as a majorreversal indicator. This pattern, well-known to chartists, appears as a left shoulder, a head,and a right shoulder (Figure 9-2).
The head-and-shoulders top is developed in the folfowing manner:
1. A strong upward breakout reaching new highs on increased volume. The move ap-pears to be the continuation of a long-term bull move.
2. A consolidation area formed with diminishing volume. This can look much like adescending flag predicting an upward breakout, or a descending triangle indicatinga downward breakout.222 CHARTING
 
 
FIGURE 9-2 Head-and-shoulders formation.
 
Head
        
RightLeft shoulder
shoulder
Neckline
  
 
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.
4. Another descending flag or triangle is formed on further reduced volume followedby a minor breakout without increased volume. This last move forms the rightshoulder 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 trading a head-and-shoulders top formation involvingincreasing degrees of anticipation:
la. 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, thelost opportunities usually outweigh the improved entry prices.) Use the samestops as in Step la.
2a. Sell when the right shoulder is being formed. A likely place would be when priceshave retraced their way half of the distance to the head. A stop-loss can be placedabove the top of the head.
b. Wait until the top of the right shoulder is formed and sell with a stop either abovethe 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 head for a protective stop is con-servative.
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 lossesTOPSAND 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 lowerrisk. 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 resumed their direction. It may be that two or
4
 
 
FIGURE 9-3 Double and triple tops.
- . ResistanceResistance
Third top oftenfalls short224 CHARTING
 
three peaks at very similar prices are very unusual and a poor way to trade. A perfect testof the top means that there is uncertainty at that moment and significant selling developedafter the fact.
Now You See It, Now You Don’t!
The “V”-top (actually an inverted V), or spike, is the most difficult top formation to antici-pate and trade. Its frequency in the 1974 and 1980 markets tended to deceive a generationof new speculators. V-tops are caused by critical shortage and demand and magnified bypublic awareness. In 1974, it was a combination of domestic crop shortage, severe pres-sure on the U.S. dollar abroad, and foreign purchases of U.S. grain that combined to drawpublic attention. The news was so well publicized that novice commodity traders withdrewtheir funds from their declining stock portfolios and bought any commodity available as ahedge against inflation.
It could not continue for long. When the top came in soybeans, silver, and most othercommodities, there was no trading for days in locked-limit markets; paper profits dwin-dled faster than they were made, and the latecomers found their investments unrecover-able. The public often seems to enter at the wrong time. The case of cattle is an example.
Live cattle prices are based on a combination of consumer demand, substitute foods,current health news, and the price of various feed grains. During 1973 as the price of feedincreased, cattle prices rose steadily from under 40¢ per pound to almost 54¢ in August.Prior to that, live beef prices had never been over 37¢ (in 1952). The price of soybean meal,used as a high-protein feed, continued to move prices higher. How high could it go?Between August and October, live-cattle prices formed a V-top and declined back to under40¢, giving up the 8-month gain in 2 months. How could the supply-and-demand factorschange so quickly? They can’t. Fast rises are always followed by fast, usually extensivedeclines.
The psychology of the runaway market is fascinating. In some way, every V-top sharesa similarity with the examples in Mackay’s Extraordinary Popular Delusions and theMadness of Crowds. With beef, the consumers do not tend to consider pork, fowl, or fishas an adequate substitute and will bear increased costs longer than expected. As pricesneared the top, the following changes occurred:
* The cost became an increasing factor in the standard household budget.* Rising prices received more publicity.
* Movements for public beef boycotts began.
* Grain prices declined due to the new harvest.
This becomes a matter explained by the Elastic Theory. It can be applied to the 1973soybean and 1980 silver markets as well. The Elastic Theory is based on the principle thatwhen prices get high enough, a number of phenomena occur:
- 1. Previously higher-priced substitutes become practical (synthetics for cotton, re-claimed silver). ~ ~2. Competition becomes more feasible (corn sweetener as a sugar substitute, alternateenergy).3. Inactive operations start up (Southwest gold mines, marginal production of oil).4, Consumers avoid the products (beef, bacon, silver).
Consequently, the demand suddenly disappears (the same conclusion arrived at by econo-mists). -
Announcements of additional production, more acreage, new products, boycotts, anda cancellation of orders all coming at once cause highly inflated prices to reverse sharply.GAPS 225
 
These factors form a V-top that is impossible to anticipate with reasonable risk. There is anatural reluctance to take profits while they are still growing. Further impetus is given tothe reversal because of the scramble to liquidate after the first reversal day. This is followedby those latecomers or pyramiders who entered their most recent positions near the topand cannot afford a continued adverse move. The mush to close out long positions, put onnew shorts, and liquidate deficit accounts only prolongs the sharpness of the V-top, caus-ing a liquidity void at many points during the decline.
Quantifying Spikes
A spike is often the focal point of a trade. Most often it represents a severe reaction to anevent, but it may be an island reversal representing a new direction. A spike is importantbecause it always indicates high volatility and exceptional risk and cannot be ignored. Aspike has only one dominant feature, a price high or low much higher or lower than recentprices. This must result in volatility that is equally extreme. The easiest way to identify anupside spike is to compare the day’s trading range with previous ranges and to the nextday. This can be done by using the average true range and satisfying both the followingconditions:
High today — @highest(high,n) > K x average true range(7)High today — high tomorrow > K x average true range(n)
Today’s spike high must be higher than the highs of the previous -days by a multiple, K,of the average true range; it must also be higher than tomorrow’s high if it is to stand outas a spike.
GAPS
A gap is a formation caused by a jump in price from one point to the next and can be cal-culated as
Gap = @AbsValue(open - close[1])
Gaps are phenomena that make sense only when trading is restricted to local businesshours. A currency trader with 24-hour capability has, theoretically, a very small chance ofconfronting a gap. Most gaps are overnight moves, where continuous events causechanges in price levels; when the exchange or banks open for business the price immedi-ately jumps to the new level. A market with very large relative gaps is the Japanese yen trad-ing in Chicago. During the Japanese business day, when most relevant news occurs, theInternational Monetary Market (IMM) is closed; when the IMM is open, most businesses inJapan are closed. The Chicago market is therefore always trying to catch up to the price ofthe dollat/yen as seen by the Japanese. ~
There is also a technical situation associated with price gaps. Traders place moreorders to buy at a point near or just above a resistance level; similarly, they place sell ordersjust below support lines. This causes fast moves and a void of orders when resistance andsupport are penetrated. Gaps also occur after a price shock or any unexpected new releaseor economic report.
A gap appears as an open area on a chart created by prices trading entirely above orbelow the prior trading range. Gaps will usually occur at the opening of the day, a newsrelease, or where prices break out of a clearly identified formation, such as a long-termtrendline, a consolidation area, or during a prolonged major price move. Regardless of thereason, it is the consequence of a lack of speculators willing to take the opposing positioncausing a thinly traded or illiquid market. In the most interesting situations, the break-away gap is the name given to the result of many stop-loss orders placed at new highs or226 CHARTING
 
lows, at major trendlines as protection against unfavorable breakouts with respect to exist-ing positions, or as an entry to a new position. The breakaway gap usually signifies achange from the previous, well-established pattern.
The common gap is the least glamorous. It occurs within a well-defined trading rangeor pattern, and is not indicative of a change of direction nor does it have other specialattributes; hence it is called “common.” Both runaway gaps and midway gaps refer tothose price jumps occurring within a strong trend. They are associated with periods ofilliquidity within a move; this could be the result of additional news to encourage the bullsor bears, or it could be a critical chart formation or anticipated reversal point that fails.Runaway gaps indicate stronger moves.
The exhaustion gap or island reversal is the culmination of a major move; unfortu-nately, it is a formation only identifiable after the fact. If the price move has been excep-tionally extended, it is likely that the first gap reversal will be the beginning of the trendchange; however, there is a great risk associated with it.
Gaps are a hindrance rather than an asset to trading. A breakaway gap usually causesstop-loss orders to be executed far away from the stated price. If a long position is enteredin anticipation of a breakout, that breakout never occurs and a high price is guaranteed, Ifthe breakaway gap occurs on light volume, a position might be entered on a pullback. Inthe final analysis, if the breakout represents a major change, a trade should be enteredimmediately at the market price. The poor executions will be offset by a single time whenprices move quickly and no pullback occurs. A breakaway gap on high volume should bemore indicative of such a major change.
Many traders believe that prices will retrace and “fill the gap” that occurred sometimeearlier. There are analysts who never give up, but waiting to fill a gap that is more than twoyears old may be carrying this technique too far. There is no doubt that the gap representsan important point at which prices move out of their previous pattern and begin a newphase. The breakaway gap will often be a position just above the previous normal pricelevel. Once the short-term demand situation has passed, prices should return to near nor-mal (perhaps slightly above the old prices), but also slightly below the gap.
KEY REVERSAL DAYS
A formation that has been endowed with great forecasting power is the key reversal day,sometimes called an outside reversal day. It is a weaker form of an island reversal. A bear-ish key reversal is formed in one day by first making a new high in an upward trend, revers-ing to make a low that is lower than the previous low, and then closing below the previousclose. It is considered more reliable when the prior trend is well established. This could beidentified using EasyLanguage asKeyReversalDown = 0;@if close[1] > @average(ctosefil,n) and high >= @highest{high{i],n) and
Yow < lowfl] and close < closefl] then KeyReversalDown = 1;
where the first term tests for an uptrend over n-days, the second tests that this day is the-highest price of the Same 7-days, the third verifies a lower low, and the last tests a lowerclose. 7
- Studies have shown mixed results using the key reversal as a sole trading indicator. Themost complete analysis,” similar to others, concluded that the performance was “strikinglyunimpressive.” Even though tests have not proved its importance, traders still pay closeattention to key reversals. Based on this, it must be concluded that other factors uncon-sciously enter into the normal perception of a key reversal. A trader’s senses should not be
'© Eric Evans, “Why You Can't Rely on ‘Key Reversal Days’,” Futures (March 1985).EPISODIC PATTERNS - 227
 
underestimated; the extent and speed of the prior trend, a change in liquidity, a quietertone, or some external news may be essential in confirming the important reversals.
Pivot Point Reversals and Swings
A pivot point is a trading day, or a price bar, that is higher or lower than the bars that comebefore and after. It is the common form of an island reversal and a popular way of identi-fying turning points. The most frequent pivot point high is a bar that has a higher high thanone day before and one day after. More significant swing highs can be found by comparingthe high of any day with two or more days before and after. This is the method used inTradeStation’s “Swing High Bar” function. The pattern of the days on either side of thehigh bar are not important as long as the middle bar has the highest high.
Pivot points are used as the basis for finding swing highs and lows, and they identifythe extremes of both price and oscillator for TradeStation's divergence functions. Forexample, if the last two price pivot points correspond to the same days as the last two sto-chastic or RSI pivot points, and prices are rising while the momentum is falling, there is abearish divergence. When more days are used to identify pivot points, these divergence sig-nals are expected to be more significant; unfortunately, they take longer to identify.
Cups and Caps
Another name given to the pivot point reversals are cups and caps, each determined byonly three price bars. These two formations are associated with trading rules that are iden-tical to pivot point channels applied to the shortest time frame. Contrary to their names, acup formation identifies a sell signal when the trend is up, while a cap is a setup for a buysignal in a downtrend. Once an uptrend is clear, a cup formation is found using either thedaily closes or daily lows. For any 3 consecutive days, the middle day must have the lowestclose or the lowest low. In a cap pattern the middle day must have the highest high or thehighest close of the 3-day cluster. In both cases, the positioning of the highs and lows ofthe other 2 days are not important as long as the middle day is lower for the cup and higherfor the cap.The cup will generate a sell signal if:
1. The cup formation is.the highest point of the uptrend.2. The sell signal occurs within 3 days of the cup formation.3. The current price closes below the lowest low (middle bar) of the cup formation.
The signal is false if prices reverse and close above the high of the cup formation, resum-ing the previous trend. This pattern is only expected to forecast a downward price move oftwo days; however, every change of direction must start somewhere, and this formationcould offer an edge. A cap formation is traded with the opposite rules.
According to tests by Colby and Meyers," entries that occur based on a breakout of thehighs or lows of the pivot points, called pivot point channels, are much more reliable thansimply entering in the direction of the reversal based on the close of the last bar of thepivot point, cup, or cap formation. For traders not interested in this very short-term strat-egy, a pivot point may help entry timing for any longer-term method.
EPISODIC PATTERNS
There is little argument that prices change quickly in response to unexpected news. Thetransition from one major level to another is termed an episodic pattern; when these tran-
¥ Tests of pivot point reversals and pivot point channels can be found in Robert W. Colby and Thomas A. Meyers,The Encyclopedia of Technical Market Indicators (Dow Jones-Irwin, 1988).228 CHARTING
 
sitions are violent, they are-called shocks. The coffee and oil markets have received thegreatest number of shocks; however, all markets are continually adjusting to new price lev-els, and all experience occasional shocks.
The pattern that results from episodic movement is exactly what one might expect. Fol-lowing the sharp price movement there is a period when volatility declines from its highs,narrowing until a normal volatility level is found and remains at that level (Figure 9-4).
Patterns that result from rising prices are not the same as falling prices. Althoughhigher price moves usually overshoot the price level at which they normally settle, sharpdeclines do not reach their final levels during the first shock.
Price shocks have become the focus of much analytic work. Because a price shock is anunpredictable event, it cannot be forecast. This has a critical effect on the way in which sys-tems are developed, especially with regard to the testing procedures. This topic is coveredin other parts of this book under the topics “Price Shocks,” “Robustness,” and “Optimiza-tion.”
PRICE OBJECTIVES FOR BAR CHARTING
There is some satisfaction in having a price objective for a trade that has just been entered.If this objective can be determined to a reliable degree, those trades would be selected thathave the best profit potential as compared with the risk. It is also comforting to know thatprofits will be banked at a specific point. The most successful objectives will be based onstraightforward concepts and not complex calculations.
The simplest and most logical price objective is a major support or resistance levelestablished by previous trading. When entering a long position, look at the most well-defined resistance levels above the entry point. These have been discussed in a previoussection of this chapter, “Tops and Bottoms.” When those prior levels are tested, there isgenerally a technical adjustment or a-reversal. In the case of a strong upward market,volatility often causes a short penetration before the setback occurs. Placing the priceobjective a reasonable distance below the identifiable major resistance level will always besafe, the intermediate resistance levels can be used for adding positions on technical rever-sals. The downside objective can be identified in a similar manner: Find the major supportlevel and place a stop just above it. .
X
 
FIGURE 9-4 Episodic patterns. (a) Upward price shocks. (b) Downward price shocks.
Te
 
    
Congestion
Stabilization
 
{a)PRICE OBJECTIVES FOR BAR CHARTING 229
 
When using both support and resistance price objectives, watch carefully for a viola-tion of the current trend; don’t be rigid about the position. Take advantage of each reac-tion to add to the position, but get out if the major trendline is broken before the objectiveis reached. On the other hand, if the goal is reached and prices react as predicted but thenreverse and break through the previous highs or lows, the trade may be reentered on thebreakout and a new price objective calculated.
There are other, more analytic ways to determine the objective of a trade. Bear in mindthat these methods are considered guidelines and are not precise. If you have set a singleprice target for a long position, and it falls slightly above a resistance level, then the resis-tance level (the closer point) should be substituted for an original price objective.
The head-and-shoulders top has a downside objective that is associated with its volatil-ity. This objective is measured from the point where the right shoulder penetrates theneckline and is equal to the distance from the top of the head to the neckline (Figure 9-5).For a major top, this goal seems modest, but it will be a good measure of the initial reac-tion and will generally be safe, even if a new high price is reached later.
For a consolidation area, both top and bottom, a counting method based on thewidth of the rectangle or consolidation pattern is used to find the price target. For a bas-ing formation, the objective is the vertical distance above the support line equal to thewidth of the consolidation area (Figure 9-6). For downside objectives, measure verticallydownward from the resistance line forming the upper bownd of the congestion area, a goalsimilar to the head-and-shoulders top. This technique implies that the longer the consoli-dation area, the bigger the subsequent breakout. The same method can be seen later inpoint-and-figure charting.
Trendlines can also be used to measure the expected price move. The most commontechniques are based on channel volatility and, therefore, set very modest, realistic targets.
1. The channel width, which bounds a trend, will be equal to the price objective mea-sured from the point of the channel breakout (Figure 9-7).
 
FIGURE 9-5 Head-and-shoulders top price objective.
 
   
Breakoutofneckline _
Price =objective230 CHARTING
 
Fa elFIGURE 9-6 Consolidation price objective.
 
Priceobjective
   
Resistance
  
{ Support 1—————— 0d ———— +
 
2. Once a breakout of an upward channel has occurred, construct a new descendingchannel, This is done by connecting the high of the uptrend with the high of thefirst reversal following the break, then drawing a parallel support line across thelow of the first breakout, The new channel will be shallow but will serve as a guide-line for the price change. A second channel, drawn after the next reversal, shouldindicate the final direction of the new move.
In Figure 9-8, the original channel around the uptrend was broken at the point markedby