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P attern recognition has been the topic of much technical literature. From the Elliott wave theory to
Edwards and Magee, traders have been told that some fairly well-defined chart patterns indicate the
market's position and the most likely outcome of the ensuing market activity, as indicated from a
particular chart pattern. While it is important for every trader to be familiar with traditional chart patterns
that have been found to be reliable indications of the market position, it is also important for the trader to
analyze any individual market for the way in which it unfolds in bull or bear cycles and for patterns
unique to that market. A trader will find that for every unique market there is often a form in which a
cycle will unfold and there is a chart pattern of activity that develops at important junctures.
Now look at the Treasury bond market to discover how an analysis of the form and pattern of that
particular market would give us usable information to make profitable trading decisions. First, look at the
history of the Treasury bond market to see what we would learn from the history of the market's form and
pattern as they unfold.
Note the form and pattern of the 1981-86 bull market (Figure 1). From the September 1981 low, the
market made a strong advance into the May 1983 high. Note the nature of market activity at that high.
The initial high was made in November 1982. Six months later, in May 1983, the market exceeded the
November high slightly and then sharply declined, closing the month near monthly lows and resulting in
an outside reversal month.
Then, the market continued to decline into the July 1984 low. From the 1984 low, the market made two
relatively short advancing swings, making the highs in January and June 1985. The June 1985 swing high
topped slightly above the swing high of May 1983 before consolidating for four months. In November
1985, price broke decisively above the resistance level, with a monthly close above the prior swing highs
of June 1985 and May 1983 and closing near the high of the month. The market continued to advance
strongly into the extreme high of April 1986.
TRIANGLE CONSOLIDATION
From the April 1986 high, the market consolidated for 11 months in a triangle pattern, never able to
exceed either the extreme April 1986 high or even the first corrective high of August 1986. In March
1987, the market made an attempt at the August 1986 swing high but closed down near the low of the
month in an outside reversal month. From that decisive failure to advance, the market declined sharply
the following month below swing and consolidation support levels, confirming that April 1986 was likely
to be the termination of the bull campaign and that the market was likely to either correct the advance
from the July 1984 low or the entire bull market from the September 1981 low.
CLEAR RECOGNITION
Now take the analysis up to the latter part of 1989. At that point, the trader should have clearly
recognized that the bull campaign from the October 1987 low was unfolding in the same general pattern
as the bull campaign from the 1981 low into the 1986 top. The bond market exhibited similar pattern
characteristics at important resistance levels.
In the latter part of 1989, we can suspect the market was in a position similar to the market following the
1986 high. If the form of the market activity was to be fulfilled in the same manner as the activity
following the 1986 high, the trader could anticipate the August 1989 high would not be exceeded and,
once the market did finally break below the consolidation levels, a sharp decline would probably follow
that would either correct the advance from the August 1988 low or from the October 1987 low. However,
markets do not always fulfill our expectations, which is why we must have trading strategies that
incorporate the shorter-term price patterns as well as the time dimension.
The daily chart clearly demonstrates the blowoff top into the August 1, 1989, high (Figure 3). This top
was preceded by a sharp advance to new highs that culminated in an exhaustion gap on August 1 and a
close below the gap two days later that confirmed the top. The market then made a typical ABC-type
correction, followed by another sharp rally that tested the August 1 high. The nature of the test of the
August 1 high on October 16 was an important clue to the position of the market. On October 16 the
market made a very wide range day, exceeding the August 1 high intraday, but closed near the low of the
day, well below the prior swing high resistance level, an indication of weakness at this high price level.
For the next two months, the market traded in a tight trading range. While we have identified the market
activity at this point as being very similar to the pattern from a longer-term perspective of the market
activity going into and following the April 1986 campaign high, we can never be certain whether this is a
distribution period whence prices will eventually make a significant correction or an accumulation period
at major resistance that will be followed by a breakout to significantly higher levels.
TIME ANALYSIS
The time analysis has indicated that the week of December 19 (12/17-18 = weekend) is an important
projected turning point period (PTPP), which has a high degree of probability of change. I use a
technique called Time Cycle Ratio (TCR) analysis to project turning point periods. This analysis is based
on Fibonacci ratios of day counts between past turning points in the market. I count the number of days
between turning points, multiply the result by a number from the Fibonacci series and add this amount to
the last turning point. This period had a large cluster of important time factors, including:
December 17 = 1.618 TCR 10/19/87L-8/16/88L
AFTERWORD
It is always easy to analyze a market after the fact and illustrate the relationships and profitable trading
strategies. I have illustrated how the market can be analyzed beforehand to prepare the trader. The long-
and short-term pattern of the bond market activity going into late December 1989 indicated well in
advance that the market was making an ideal setup for a major decline based on the characteristics of
previous tops. The market's failure to unfold as expected would be likely to result in a breakout to new
highs and a significant advance, but whatever might happen, the trader was able to position to take
advantage of a probable major move by being prepared for when change was likely. The strategy, in fact,
took advantage of our knowledge of the position, pattern, time and price analysis of the market activity.
A key to successful trading is to have the patience and discipline to take action only when the market
activity from all perspectives clearly indicates the most probable forthcoming action. Never initiate a
trade without a thorough knowledge of the peculiarities of the particular market. When the time, price
and pattern of market activity coincide to indicate change, the trader has the best opportunity for profits.
Edwards, Robert D., and John Magee [1966]. Technical Analysis of Stock Trends , John Magee Inc.
Miner, Robert [1991]. "Price as a trading tool," Technical Analysis of STOCKS & COMMODITIES, Volume 9:
April.
___ [1991]. "Time as a trading tool," Technical Analysis of STOCKS & COMMODITIES, Volume 9: March.
___ [1989]. "Time, price and pattern," Technical Analysis of STOCKS & COMMODITIES, Volume 7: May.
FIGURE 1: During May 1983 the bond market tested resistance a second time and failed to hold the
gains, thus signaling a top. In November 1985 the fourth attempt at resistance was successful and a
powerful bull market was underway.
FIGURE 2: The market successfully broke through the November 1988 and January 1989 tops on its
third attempt (May 1989). The price move above the double top did not run its course until August 1989.
FIGURE 3: The August 1989 selloff and the October 16, 1989, reversal day forewarned of the potential
top.