Technical Analysis Plain and Simple: Charting the Markets in Your Language, Second Edition

Sizing Up a Pattern

The first step in determining where a market is heading is to correctly define the current trading pattern. The easiest pattern to define is the rectangle, or trading range, because of its uniform size.

The first step in determining where a market is heading is to correctly define the current trading pattern.

In theory, the bottom of a rectangle is the price level at which bulls have decided that the market is undervalued. They are either reacting to changes in market sentiment, as indicated by a break above resistance, or following an existing trend higher. Price moves toward the top of the rectangle where profit taking occurs. This moves the market toward the bottom again.

At this time, the rectangle pattern is not yet ...