CHAPTER 12
Envelopes and Methods of Price Containment
LEARNING OBJECTIVES
After studying this chapter, the practitioner and student should be able to:
- Understand the importance of price containment as a technical tool for forecasting price reversal as well as continuation
- Apply the concepts of price containment to various stocks and markets
- Identify and differentiate between the different forms of price containment and understand their individual strengths and weaknesses
- Identify any bearish or bullish confluence that will add to the weight of the evidence about potential future price behavior
- Understand how to tune envelopes and bands to important dominant cycles
The art and science of price containment is primarily about the identification of significant price reaction levels. It helps to identify levels of potential price reversals and continuations and may be applied to practically any market. In this chapter, we shall be discussing the five basic forms of price containment and see them in action in various stocks and markets.
12.1 CONTAINING PRICE ACTION AND VOLATILITY ABOUT A CENTRAL VALUE
An envelope is an overlay indicator that comprises an upper and lower band. It is used primarily as a means of containing price action. The main areas of focus when dealing with bands include the:
- Reaction of price at the central value and bands
- Direction of the central value bands
- Amount of divergence between the bands
- Distance of price from the bands
- Bandwidth as a function of ...
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