P1: PIC/PIC c03
August 18, 2008
Printer: Yet to come
Practical Pattern Recognition for Trends and Corrections
trend or correction? Letâ€™s tackle whether a market is in a trend or correction first. This simple piece of information can be very helpful to a trade strategy. The key is to identify if a market is making a correction. Why? If a market is making a correction, it should not take out the extreme that began the prior trend, but should eventually continue the trend direction prior to the correction and make a new extreme. Letâ€™s illustrate how this simple information can be very valuable. Figure 3.3 shows a market that is making a decline following a strong advance. If the market is making a correction to the bull trend, it should not decline below the March 14 swing low shown on the chart and should eventually make a new high. It would be very valuable to have reliable information if the decline is a correction, because the downside potential would be very limited and the upside following the end of the correction would be very significant. There is one simple pattern guideline that is very reliable to warn if a market is probably making a correction and not a new trend to a new extreme. If a market overlaps a section, more than likely it is making a correction. An overlap is when a market makes a new low or high, and then trades back into the range of the prior section.
FIGURE 3.3 Trend or Correction