Here is another example of the same pattern (chart 80). Again, the opportunity comes from
the third test of support. You can, in both moves out of the base pattern, see the indication of
strength being show by the “spacing” that develops after the move to new highs. The second
example is indicated by the dollar sign ($). If we turn this chart upside down, we can see a
very important difference between the two charts. In the downtrend the testing is all to the
upside and produces tops. In the bull trend the testing is to the downside. This is factual and
is the way markets trade a majority of the time. The second pattern of three drives against
resistance and no downside testing of the lows a classic intermediate term counter trend
within a bear trend. Notice how the last move was vertical, in both charts. Once that
exhaustion was complete, it should have exhausted the move for some period of time. So
which direction being tested is significant?
The next chart is VZ (81) and is another US stock. Notice all of the upside testing during
August. It had a great chance to break from that pattern to the downside but didn’t do it and
came back up for a false break top. The October spike low was followed by a 14-day rally.
By the time 14 days had expired while moving down it was at a higher double bottom. It then
rallied four days and by the time it had moved down 4 days, it was still above the low that
started the rally and was producing low number two. It then rallied two days at the start of
December and three days down was producing another and third higher low. When the
market broke above the October/November high it consolidated. Keep in mind the high we
want to measure the counter trend against is the high that is within the move up and not the
October high. So the high of the early two-day December rally is the important high and that
did not get broken. Once it broke above the obvious resistance there was a wide range day
down, actually an outside day down that had 4 days against the spike and came out of the
pattern with a “signal of strength.” Notice the small, lower high in March as that is a common
pattern and the following wide range day would be significant considering the previous three
months style of trend. The April high was again, something that is typical for this stock.
Notice the last failed drive was a 4-day rally. A great many times when the market is going to
fall out of a pattern as this April pattern, the last move will be three or four days or the time
period of a first degree counter trend. We could again, turn this chart upside down and the
patterns would be just as valid.
