FIGURE 9-6 Consolidation price objective.

Price obieciiveQ

2. Once a breakout of an upward channel has occurred, construct a new descending channel. This is done by connecting the high of the upttend with the high of the first reversal following the break then drawing a parallel support line aaoss the low of the first breakout. The new channel will be shallow but will serve as a guideline for the price change. A second channel, drawn after the next reversal, should indicate the final direction of the new move

In Figure 9-8, the original channel around the uptrend was broken at the point marked by the black dot, followed by prices moving down to point a and reacting back up to point b. When a new high is not made at point b, a resistance line (IR) can be drawn fran the prior high b to the top of the latest move b. A line parallel to IR can be constructed at point a, forming the initial downward channel. Price objective I is on the support fine of the new channel (IS) and is used once the top at point b is ddermined. Price objective I cannot be

FIGURE 9-7 The channel width as a price objective.

Price objective

expected to be too precise due to the early development of the channel, if prices continue to point and then rally to d, a more reasonable channel can now be defined using trendlines 2R and 2S. The support line will again become the point where the new price objective is placed The upper and lower trendlines can be fiirther refined as the new high and low reactions occur. The primarj trendline is always drawn first, then the new price objective becomes a point on the parallel trendline.

Triangles and flags have objectives based on volatility in a manner consistent with other pattems. The triangle objective is equivalent in size to the initial reaction, which formed the laigest end of the triangle (Figure 9-9a). The flag is assumed to occur midway in a price move; therefore, the objective of a new breakout must be equal to the size of the move preceding the flag (Figure 9-9b). Recalling the comments on the problems associated with the decreasing volatility of the triangular formation, the use of the first reaction as a measure of volatility is a safe way to avoid those problems.

The Rule of Seven

.A.nother measurement of price objectives, the Rule ofSeven, is credited to Arthur Sklarew, it is based on the volatility of the prior consolidation formation and computes three successive price objectives in proportion to one another. The Rule of Seven is not sj-mmetric for both uptrends and downtrends. Sklarew believes that, after the initial leg of a move, the downtrend reactions are closer together than the reactions in a bull market. Because the downside of a major bear maiket is limited, it is usually characterized by consolidation. Major bull maikets tend to expand as they develop.

To calculate the objectives using the Rule of Seven, first measure the length L of the initial leg of a price move (from the previous high or low, the most exfreme point before the first pullback). The objectives are:

1. In an uptrend..

OBJ 1 = prior low + (L X 7/4)

OBJ 2 = prior low + (L X 7/3)

OBJ 3 = prior low + (L X 7/2)

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FIGURE 9-8 Forming new channels to determine objectives.

First point of reversal

FIGURE9-9 Triangle and flag objectives, (a) Triangle objective is based on the width of the initial side, s. lb) Flag objective is equal to the move prior to the flag formation.

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2. In a downtrend..

OBJ I = prior high-(Lx 7/5)

OBJ 2 = prior high - (L X 7/4)

OBJ3 = priorhigh-ax7/3)

The three objectives apply most clearly to major moves. During minor price swings it is likely that the first two objectives will be bjpassed. In Sklarews experience, regardless of whether any one objective is missed, the others still remain intact.

CAM5LEST[CK CHARTS

For a technique that is reported to have been used as early as the mid-I600s, Japanese candle charts were slow finding their way into the western method of analjsis. In actuality, candle charts only differ from simple bar charts by shading the piece of the bar between the opening and closing prices-white if the close is higher than the open and black if the close is lower than the open. The shaded area is called the body, and the extended lines are the shadows. With this simple change, we get an entirelynewway of looking at and interpreting charts. The pattems become much clearer than the western stjle of line chart. Over the centuries many of the candle formations have been given names representing their significance (see Figure 9-10):