By L.A. Little of Technical Analysis Today.
: The classic definition of an uptrend is a series of higher highs and higher lows. I enhance this with the concept of volume confirmation. Thus, an uptrend is a series of higher highs and higher lows where volume confirms price at the swing points.
: The classic definition of a downtrend is a series of lower highs and lower lows. I enhance this with the concept of volume confirmation. Thus, a downtrend is a series of lower highs and lower lows where volume confirms price at the swing points.
: An uptrend or downtrend where volume does not confirm price action, thus the trend is suspicious and not to be trusted. It remains the trend however and, although you cannot assume that the trend will immediately change, you should become more careful and take precautions as a result of it having become suspect.
: An uptrend or downtrend where volume does confirm price action, thus the trend is confirmed and is to be trusted.
: The Trading Cube combines time with trend for a given instrument. In its full form, trend (confirmed or suspect) is visually represented for a given time frame for each respective instrument. When evaluating an equity, you typically want to understand the trend of the equity as well as the sector and general market that the equity trades in/on. The time frames are broken into three categories: short, intermediate and long term. Depending on the type of trader you are, the time frames can be of differing lengths. Unless specifically called out as different, when I refer to a short, intermediate, or long term time frame, I am using the following lengths:
- Short Term: three months. I usually view this on a daily candle chart which amounts to 60 bars.
- Intermediate Term: nine months. I usually view this on a weekly candle chart which amounts to 36 bars.
- Long Term: three years. I usually view this on a monthly candle chart which amounts to 36 bars.
Volume at the Top
: Many times, when you look at a chart on any of the timeframes you will see a high volume bar at the top of the chart. If no other bar exceeds its high price on this timeframe, that is referred to as
volume at the top
. On a practical basis, volume at the top almost always gets revisited by price somewhere in the future. It becomes a magnet for price somewhere down the road.
Volume off the Top
: Volume off the top is a situation where volume expands significantly as prices decline from a nominal high. It is not necessary that the high volume bar be the high price bar on the timeframe you are examining but it must be with a couple bars of the high volume bar. Volume off the top is a clear warning sign that on the timeframe you are examining, something has gone awry. It is a danger sign and usually means that you want to exit your positions or, at a minimum, become very defensive in your trading for the instrument this has happened to.
: The AB=CD pattern was identified by H.M. Gartley in 1935 and has been incorporated/embellished upon many times since. It has these characteristics:
1. BC cannot exceed the AB leg, meaning the retracement of AB cannot exceed 1.00.
2. BC Can be a 1.00 retracement of the AB leg although this is rare.
3. D must exceed B in order for the pattern to complete at point D and be a valid AB=CD pattern.
4. When prices on the CD leg pass the B point, volume must expand as price closes beyond the B point.
Given this definition, the typical price projection for the completion of the pattern is to extend the CD leg at a length equal to the AB leg. Here's an example:
L.A. Little is an author, professional trader and money manager who writes daily on
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