during consolidations. Upon reviewing my file on bear market consolidations, my research indicated the weak stocks will generally not rally until either a test of the first bottom or a higher bottom is made by the market.

While the market is consolidating, the consolidation can be analyzed to see if it has bullish or bearish implications. One method of doing this is to look at the position from the low of the drive up, using Ganns angles in order to determine if the market is in a strong or weak position, and this will be described later in this book. A second method for analyzing the price action within a consolidation, is to use the square of the consolidation range. This can be a very powerful timing tool. Again, the square of the range is described later.

The normal market consolidation tends to be horizontal in nature. This is, also, true of individual stocks. Consolidation moves that tilt upwards tend to be bearish, while those that tilt downward tend to be bullish.

There Is a basic rule of thumb that can be applied to consolidation top and bottom zones. The third move against those zones is the most important move. A failure on that third attempt to go through either the top or bottom, will usually result in a fast move in the other direction. This will appear as a triple top or bottom on your charts. And the fourth move, or attempt, will usually break through that consolidation zone and be the start of a fast directional move. To see the validity of the fourth move against a zone, you should check as many charts as you can, and look for quadruple tops and bottoms. These are very rare.

Once a top and bottom for a consolidation are established, you oan use a consolidation trading strategy. With a high established, the market or stock will move down to either the previous swing high or old top, or a division of the range which it created while moving up. Ranges will be discussed later in this book. Once support IS established, then the market will move up to the top that has been established for that consolidation. When you are reasonably certain that the market or stock is in a continuing consolidation movement, you should look to sell at, or slightly above, the old tops, and buy at old bottoms, standing aside until a good setup comes.

A setup to look for during a sideways movement, and one which indicates distribution has run its course, is a false breakout, or a move above a sideways zone that fails to extend the move during the next week. A good rule of thumb to judge whether a breakout move is false, is the movement should not go three points above the old high. This is general, and applies to stocks in the medium price range, say from $50 to $100 per share. Very fast moves result from false breakouts and false breakdowns. Significant changes in trend will often occur from those points. Youll notice most of these false moves will be punctuated with reversal weeks. Illustration 2.1 shows a false breakout in IBM during the week.of 5/4/84.

Generally a false breakout up, or false breakdown will start with the type of momentum that appears to be strong move in price (in that direction), then no Turther momentum develops, and price reverses the following week. When this general knowledge of false moves is used in conjunction with price and time analysis from the Gann techniques, it makes good, confirming evidence that a major top or bottom may have been found.

Another technique or chart pattern I watch for during consolidations is when a stock or index trades in the same range three or, preferably four days in a row, and the highs and lows are within 1/4 to 3/8 of a point. I call this type of action a nesting formation, and have found this very useful in trading. A breakout from that nest will usually yield a fast three day move, and more often that not, the beginning of a multi-week movement.

You can, also, look for the first rally from a consolidation bottom to yield a good correction down. This is caused by stock holders who have long term gains, and who did not sell at the first top in the consolidation- taking the rally as a second opportunity to sell. The next low from that second top should be judged to see if the market appears sold out. One good indication of this would be a few small volume down days followed by a large volume up day, with a higher low and a higher high. The reverse of this is true at tops of consolidations.

SECTIONS OF MARKET CAMPAIGNS

There is a text of knowledge currently referred to as wave analysis or Elliott Wave. Mr Gann explains this as sections of a campaign. The following is Ganns analysis of this subject.

"A Bull or Bear Campaign in stocks on the averages runs out in 3 to 4 sections-

BULL MARKET

1st Section- Advance after final bottom; then a secondary reaction.

2nd Section- Advance to higher levels, above the highs of previous week and of the first advance; then a reaction.

3rd Section- Advance to new high for the move. In many cases this means the end of the campaign, but you must watch for a definite indication before deciding that the 3rd run up means a change in the main trend.

4th Section- Often four sections are run out and this 4th move or run up is the most important to watch for the end of a Bull Campaign and a change in trend."

"Minor Bull Campaigns of short duration, running one year or less, often run out in two sections, especially if the first section is from a sharp bottom. Therefore, always watch the action of the market after the second advance to see if it is forming a top and gives indications of a change in trend.

BEAR MARKET

A Bear Campaign runs opposite to a Bull Campaign-

1st Section- There is a sharp, severe decline which changes the main trend: then a secondary rally on which stocks are safer short sales. That marks the end of the 1st Section.

2nd Section- Then there is a second decline to lower prices, followed by a moderate rally.

3rd Section- A third decline or move to still lower prices, which may be the end of the campaign.

4th Section- There is often a 4th move, when you must watch closely for bottom. In determining whether it is final bottom, you use all of the other rules...watching old tops and old bottoms for definite indication that the main trend is ready to change.

Minor Bear Campaigns of short duration, running one year or lees, often run out in two sections, especially if the 1st section is from a sharp top. Therefore, always watch the action of the market after the 2nd decline to see if it is forming a bottom and gives indication of a change in trend.

In extreme cases, like 1929 and the Bear Campaign which followed from 1929 to 1932, there are as many as 7 sections up or down, but this is abnormal and unusual and only occurs many years a pa rt. "

Obviously, this is very simplistic as compared to the work done by many Elliott analysts. I have personally found trading by Elliott wave principles to be difficult. But understanding the basic wave theory is a critical factor to market analysis. Most of my analysis is attempting to determine if three or four sections have run out. The following rules apply; wave two cannot go to new lows; wave three can never be the shortest wave; wave four never ends in the price zone of wave one.

One bit of knowledge to keep in mind when analyzing price movement is that bull markets go up longer than they go down. And bear markets go down longer than they go up, as a general rule. So if you have a low to high six week move up during a bear trend, you can assume the move down will exceed six weeks if the trend remains down.

Look at the Value Line weekly chart (Illustration 2.7), and we will do some ordinary chart reading.