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[start]     [ 5 ]                                                                                     
You will be wise to develop an extensive understanding of these four stages of movement. Ive found it very helpful to keep file folders for each. These are filed with chart examples, and are continually being expanded.
TOPS, BOTTOMS AND CONSOLIDATIONS
Tops in the broad market take time to form. It is a rare situation when a top in the market oomes in without a test of the high in the topping formation or a marginal new high above a series of previous highs. Individual stocks will rotate into tops. Some will reach top in advance of the overall market top, and others will find their highs after the general market. Because of this, you should not let the price action in the indexes influenoe trading decisions on individual stocks. When time has expired for a bull trend, months may pass before a bear trend sets in. In these months you may see large, volatile sideways movements which eventually for the top.
Some stocks will top before the market, and some after. During a topping situation you should look a bit more in earnest at the snort side of the market, in individual stocks, than you had during the up trend leading into the time period of top. This can be done in two ways. You can look to pick the exact top in stocks which are moving up. This may mean that your first attempt will fail and you may have to look for a second attempt, although with the Gann cycle analysis you should be able to identify the time period for high within three days with consistency. A second method is to sell against resistanoe, or at a lowar nigh on those stocks already in down trends. This is obviously safer. These safer points to sell will be obvious once you develop and understanding countertrends.
One of the characteristics of a stock market, or commodity market, top is extremes- in price movement and optimism. There will be groups of stocks that will move five percent in a day and correct only one to three days while in their final move up. These are termed "blow off" moves. An understanding of blow off moves present huge opportunities and that knowledge can save you some large losees. The last week of a top in the market will usually be punctuated with extreme speculations and many over the counter stocks jumping 20 percent in a day or two. Obviously, you do not want to short early in the final stages of a market top, and you should be aware to search out possible blow off candidates when you believe a top is near.
Bottoms will, many times, show the same degree of pessimism. The rally in the final drive down will not be large enough to let anyone out and will finally capitulate into low. Spike lows are more common that spike tops for the indexes. The time cycles for this type of low should be obvious.
Indioations of the divergences you will see at tops are many, but you should not use them as a timing method in your trading.
These indications will show up as a failure of the broader indexes to confirm new highs in the narrower indexes as the Value Line to the Dow Jones Industrials. The number of stocks advancing, versus those declining, will usually not confirm a new high if a top is setting up. The number of new highs being made will show a loss of momentum, and, within a few weeks, the new low list will exceed the new highs. Look for very large volume with little price advance. All of these signs are that of a top, but they are not sins of an immediate correction. Again the time cycles are the most important factor.
Once again, tops in the market generally take many months to form. A minimum of three months of sideways action is needed to allow for distribution before a true bear trend begins. The market will be in a strong position on the monthly and weekly charts, but for the first time price will show some deterioration on a daily chart. So, your strategy will change, as you assume a topping formation. You will be looking for two or three week moves up and down, with the market edging a little higher on rallies, but unable to hold the new highs. From a trading perspective you will have significant opportunities. First to buy the horizontal support and sell or short the upper horizontal resistance. I usually assume three tests of each.
From time to time, unusual occurrences will present themselves in the market. The spike top is one of these. The form for a spike top in the market, whion is seldom seen, (the market almost always take time for distribution at a top), is a move up for a good length of time and then start a long sideweys move. Instead of breaking down out of that sideways move (which you will assume to be distribution and a top), the market will give a forty five or ninety day move up to higher highs. This happened in 1929 and in more recent history at the August 1987 high.
Although it rarely happens, when you see this in the market, you should be prepared to position against the move with only a matter of days for distribution. The distribution took place during the previous sideways prioe action. This only happens after a long bull trend. Normally a market will not come down without the prioe moving sideways for some time. If you look at the Dow monthly charts, you will see that the tops take many months to form.
By knowing that a significant top in the market will take a long time to form, and how markets move in general, you will not get bearish from sharp multi-day sell offs in the middle of trends.
Upon completing this book you should have a thorough understanding of the first countertrend move after a change in trend. This should give you the confidence to know that if you miss the top you will still be able to trade the trend and, therefore, not have a need to continually attempt to pick tops and bottoms against strong momentum.
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