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16

OOWNTHENO UHE

SIMULATED MOTION

-UPTREND UNC

J3ME-

True Channels Are Curvainear

1. A long duration cycle has caused the effect, hence it will be quite long before the previous trend is resumed!

2. A long duration cycle has large magnitude associated with it, hence the amount of price motion in the reversal is apt to be quite large.

Over the years, chartists have noted that such breakthroughs are usually followed by a significant reversal: this information has been obtained empirically. Through the application of our model, we now have shown how and why it happens from a purely theoretical standpoint. Our results and the chartists observations are quite in agreement!

The case is similar for a head and shoulder formation. We can readily see (Figure -4) that the neckline the chartist draws is in this case simply a second uptrend line. The preceding uptrend line connected the first two cyclic lows in this figure. When this trend line was broken on the downside, followed by a third cyclic low, then the second and third lows formed a new trend line, with sharply reduced upward slope. This is merely a rather crude way of causing the straight-hne segments of the chartist to conform to the curving channel that we now know exists! In fact, a head and shoulder pattern must be formed as a consequence of our price-motion model as price motion is turned by a longer duration component, so long as the time relationship of the two components in question is similar to that shown in Figure 2, from which Figure 111-4 was derived!



ABOUT DOUBLE TOPS AND BOTTOMS

But what, we ask, about a case where prices reverse without the formation of such a pattern? Figure 1 -6 shows the segment of Figure 1-2 which contributed to the formation of the head and shoulder pattern. Now note the dotted cyciicality in this figure wluch is in every way identical to the one marked "A" except that the position of each low is shifted slightly in time relative to the "A" cycle. Summing these as before, we get Figure III-7. The result of this simple change is a double top, yet another charting favorite! It becomes clear that whether a head and Moulder pattern or a double top forms-or indeed, whether a head and shoulder pattern has an up-sloping, horizontal, or down-sloping neckline-is dependent only upon the time relationdup between two cyclic components. It is also apparent that the same reasoning holds true for inverted head and shoulders patterns, and for double bottoms! In each case, the chartist notes the patterns and the most probable following action. We now know why such patterns form (and regularly!) and what causes them. We will see later how we can put this added knowledge to good use in transaction timing.

THE SIGNIFICANCE OF TRIANGLES

Let us now call into play one more element of the cyclic model. In Figure III-8, the sum of all components from Figure III-2 that formed the left shoulder of Figure

C-IOCAUZEOMO. #> ---

TIME---

The Effect Of Cycle Timing Change



DOUtLC TOP CHART FORMMION

ncURC 1-7

TIME---

How Double Tops (And Bottoms) Are Foimed

FIGUREl

SaWLATED PRtCE-*»Cn-H3N

MASNnruOe-OURATION

FLUCTUATION--

ENVEUOPE

SHORT OURATKM COMPONEMT

How Trianes Come About



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