Conduct and Practices Handbook Course (CPH) Quiz 49

Intermarket spreads
Intermarket spreads consist of buying one commodity and simultaneously selling a related commodity. Two examples are buying silver and selling gold and buying Minneapolis wheat and selling Chicago wheat. In these examples, the two markets are related, and they generally move in the same direction because the same market forces affect both. However, they move at different speeds.

Soybean processors use the soybean crush to lock in profit margins, when available. This involves the purchase of soybeans (the raw material) and the simultaneous sale of the products: soybean meal and soybean oil. The reverse crush involves the purchase of the products and the sale of beans.
The new crop/old crop July cotton versus December is popular and can be volatile. In the meats, the hogs versus cattle, cattle versus feeder cattle are the most popular. Some traders like to trade the cattle crush, which involves a purchase of corn and feeder cattle (the two raw ingredients) versus the sale of live cattle (the finished product).
By far the most popular energy spread is the purchase or sale of heating oil versus the unleaded gasoline because traders try to take advantage of the seasonal tendencies of these two products to move toward or away from each other. The Crack Spread is the simultaneous purchase and sale of the crude oil contract versus the products, gasoline and heating oil.
In the metals, the gold/silver ratio spread is calculated by dividing the price of gold by the price of silver. It represents the number of ounces of silver required to equal the price of 1 ounce of gold. In 1980, when gold was $850 and silver $50, the ratio was 17; however, in 1996, with gold at $350 and silver at $5, the ratio was 70. I’m not sure there is an average or a correct number here, but recently the ratio has traded between 30 and 70, with the average for the past century at 32.5. The purchase or sale of platinum versus the purchase or sale of gold is another popular metal spread, with a margin break for buying one and selling the other.

Exploding volatility
One consequence of eliminating people is volatility. Speed and volume have combined to make the markets more volatile than they have generally been in the past. Volatility can lead to trader anxiety; however, an anxious trader will not be a successful trader. Succeeding in trading today requires the ability to cope with exploding volatility.

There are four reasons that technical analysis makes sense:
1. “Footprints in the sand”: The smart money (who are generally the big players) cannot hide. They might be better informed, but their buying or selling has to show up in price, volume, and open interest.
2. The market discounts all fundamentals in price.
3. History does repeat, and if you don’t learn from it, you are bound to fail.
4. Markets do move in trends, and these trends are more likely to continue than not. It is the goal of technicians to determine the trend.

The trendline is perhaps the most popular of all chart tools. Remember that if you can determine the trend of the market, you’ll make money. This is what the trendline is designed to do: determine the trend of the market and keep you with the trend until it changes.
Trendlines basically are one of two types: the up trendline and the down trendline. In an uptrend, the market tends to make higher lows and higher highs. A downtrend is characterized by lower highs and lower lows. You can prove to yourself that markets move in trends by simply looking at charts and doing an “eyeball.” Note how the moves of significance are characterized by a series of higher highs/higher lows or lower highs/lower lows.
A trendline is drawn on the chart you are analyzing along the tops or bottoms of the price bars in the direction of the significant trend. In a bull or rising market, the trendline is drawn by connecting a straight line that connects higher lows. At least two points are necessary, but I recommend a minimum of three to add validity.

The rule of thumb is that the more points you have connected, the more “valid” the trendline. But here’s the rub: The more “valid” the trendline, by definition, the more price data you have to use, and, therefore, the older the trend and the closer it is to its inevitable conclusion. A broken trendline (that is, price action moving below an up trendline or above a down trendline) is a danger signal that the trend has reversed (see Figure 8.2). This is how technicians use trendlines. When an up trendline is broken, longs should be liquidated and new shorts established. Shorts should do the opposite when a down trendline is broken. Many traders place stops just under an up trendline or just above a down trendline to exit positions. If a trend is of significant duration, a trailing stop can be used, where the risk is reduced gradually daily as the stop loss is moved in the direction of the prevailing trend. In this way, the first risk is the greatest risk. The objective is first to achieve break-even, and then if everything goes according to plan, a modest profit is locked in. Over time, additional profits are locked in until the trendline is finally broken. The best and most reliable trendlines are older and, therefore, by definition, longer.

The problem with using trendlines is that, in practice, markets are not always all that orderly. A straight line assumes some sort of symmetrical series of higher lows and highs or the reverse. In the real world, markets can act this way for a time, but because of human nature or computer programs, there will be sharp and meaningless reversals in trend, which in the long run generate false trendline reversal signals. False trendline reversal signals are more likely to occur when a trendline is too steep. Steeper trendlines are generally those of shorter length; therefore, they are shorter in duration and, by definition, most likely to be violated.
Figure 8.4. Redrawn trendlines after a trendline “break” When a trendline is broken, it certainly can be used as a danger signal. But what do you do if the market in short order resumes back in the direction of the major preceding trend? You can construct a new trendline by using the new significant low or high. Technical Analysis of Stock Trends by Edwards and Magee, first published in 1948, is often referred to as the “bible of technical analysis.” The basic premise of this book is that prices of stocks and commodities move in repeating and identifiable patterns, the result of the ebb and flow of supply and demand. Although some of the concepts presented in the book at that time were new, many had been around since the turn of the century. Although markets might have changed dramatically since the 1940s, human nature has not; therefore, many of the patterns presented by these two groundbreakers remain valid today.

When trendlines are broken repeatedly and new trendlines are redrawn, the chart tends to look like a fan (as in Figure 8.4). A series of trendlines, all starting out at the same point, move in parallel. This fan effect either indicates that the major trend is still intact (albeit less steep) or the major trend is actually changing. Good interpretation and analytical tools come into play at this point; some traders have a sixth sense when this occurs.

Trend channels
Prices in a classic trend commonly tend to trade roughly within a channel. A channel is identified by constructing a line parallel to the major trendline. If a market is trending higher and an up trendline has been constructed, the top line of the channel is drawn by connecting progressive highs. In a downtrend, a parallel to the down trendline is drawn, connecting progressive lows and a channel is born (see Figure 8.5). As long as the market remains within the channel, for the most part, the market is behaving normally during a trending type period. Nimble traders look to buy on the trendline and sell toward the upper channel line (assuming that they’re in an uptrend). Active traders might also look to reverse at the channel lines, but this generally is not recommended, because they would be fighting the trend.
Markets will eventually trade outside the bounds of the channel. This can be a significant clue to subsequent market action. The general rule of thumb is that when a market trades above the upper channel line (in an uptrend) or below the lower channel line (in a downtrend), odds are that the market is entering an accelerated phase in the direction of the major trend. In other words, a significant change in the normal supply and demand balance has taken place. With bona fide breakouts of channels, the market tends to move faster, with price action becoming more dramatic. Stops can be tightened, positions can be pyramided, and your “antenna should be up” for any signs of a subsequent trend reversal. The accelerated phase of any market can be the most profitable and most exciting time to play, but it also can be the shortest. Don’t fight it; go with it but remain alert. If acting right, after it has broken out, the market should not fall back into the channel because this would be the place to exit and reevaluate.

Markets will eventually trade outside the bounds of the channel. This can be a significant clue to subsequent market action. The general rule of thumb is that when a market trades above the upper channel line (in an uptrend) or below the lower channel line (in a downtrend), odds are that the market is entering an accelerated phase in the direction of the major trend. In other words, a significant change in the normal supply and demand balance has taken place. With bona fide breakouts of channels, the market tends to move faster, with price
action becoming more dramatic. Stops can be tightened, positions can be pyramided, and your “antenna should be up” for any signs of a subsequent trend reversal. The accelerated phase of any market can be the most profitable and most exciting time to play, but it also can be the shortest. Don’t fight it; go with it but remain alert. If acting right, after it has broken out, the market should not fall back into the channel because this would be the place to exit and reevaluate.

Support and resistance
Support and resistance levels are price points that can clearly indicate at what price levels the demand or the supply for a particular commodity rests. Think of them as floors and ceilings. Simply put, support is a significant area in which buying interest develops, has developed, or is expected to develop based on past history. Support becomes evident on a price chart, as the market “bounces off support” or “holds support.”

The mirror image of support, the ceiling, is called resistance. This is a level where the market has a hard time moving higher or where a market has trouble getting above a certain point. If cotton rallies to 10000, then tail off to 9700 and back up to 9995, and it does this more than once, this is the level (at least temporarily) of resistance. In other words, resistance is an area in which the selling interest is greater than the demand.
Support and resistance levels can be drawn graphically by using a horizontal line on a bar, chart connecting the floor points, in the case of support, and ceiling points, in the case of resistance. These are important levels that indicate the areas you would expect a market to hold or to fail. As with trendline points, traders are cognizant of where support and resistance levels are. As a result, they can become a self-fulfilling prophecy, at least in the short run. If a market continues to fail at a certain resistance level, the sellers become bolder every time that price is reached, and the buyers assume that this is the place to exit.

Breakouts from consolidation
Think of a market bouncing off “support” as being similar to a ball bouncing off the floor. If the floor is a deck four stories off the ground, the ball will bounce as long it remains on the deck. But, if it subsequently falls off the deck, it drops lower. Alternatively, “resistance” is similar to a ceiling, but if a glass ceiling is smashed, the birds are free to fly higher.
Support and resistance levels are very important to traders. When a market is in a relatively flat range (holding at support and failing at resistance), it’s called consolidation. Consolidation is an inability by either the bulls or the bears to win the battle. When the market holds at some level, rallies, and then again retreats to that same level, it then appears cheap. Bulls that missed the first rally feel as if they have a second chance at “cheap” levels and step up to the plate. The shorts, especially those who are scalping and selling at higher levels, see the market start to bounce, and they’re induced to cover their shorts before their paper profits disappear. This additional buying (short covering) adds fuel to the bull move. The reverse occurs when the market rallies to the level of previous failure —the resistance point. Some of the longs who previously purchased at support might feel that the market is looking expensive and cash in. Bears, who missed selling the last rally, will consider this a “second chance” and start selling. The market starts its retreat, and other longs (who do not want to see their paper profits disappear) sell out, adding fuel to the bear fire. We know that if a market fails at a resistance level on numerous occasions and over a significant period of time, and then proceeds to trade above that level, this is a sign that the bears have lost the battle. The buying interest was finally strong enough to overwhelm the selling interest, and the defensive ceiling built by the bears has been shattered. (The opposite is happening if a support level is broken.) In simpler terms, a break above resistance or below support indicates that a major shift is probably taking place in the supply and demand fundamentals of the market in
question.

Six rules for trading breakouts from consolidation
Breakouts from consolidation are such powerful indicators of potential trend changes that you should never become complacent when they occur just because false breakouts exist. Here are my six rules for trading breakouts from consolidation:
1. The longer it takes to form a consolidation, the more significant the breakout and the bigger the expected move to follow. A breakout on a daily chart is more powerful than a breakout on a 30-minute chart, and a breakout on a weekly chart is even more powerful. A breakout from
consolidation on a yearly chart is the most powerful, signifying some major fundamental change in the supply-and-demand balance of that
market.
2. After a breakout occurs, the market can retrace back to the breakout level, but it really shouldn’t trade back into the consolidation zone. If it does, the odds of a false breakout increase.
3. The breakout should remain above the breakout level for a significant amount of time. After it moves above the resistance or below the support, you shouldn’t be in much trouble if you went with the breakout. If profits are not forthcoming in a reasonable amount of time, be wary. A quick failure is a symptom of a false breakout.
4. Watch the volume on the breakout since a true breakout is generally associated with a sharp rise in volume. Sometimes this high-volume level might precede the breakout by a day or two; however, false breakouts are usually associated with the modest volume.
5. When trading a breakout using stops, never place your stops just below support or just above resistance. All the amateurs do this, and they become bait for running the stops. It’s generally better to take a bit more risk (what
I term a “buffer”) and place your stop at a slightly greater distance.
6. A basic rule of thumb, which truly does work (use some judgment here), is that when a market breaks out from consolidation, it will move roughly the distance up or down equal to the horizontal distance of the consolidation phase. I term this phenomenon “the count.” The longer the consolidation, the bigger the count. To determine the count, measure the horizontal distance of the consolidation and then measure upward from the resistance breakout or downward from the support breakout to get an idea of the price objective for the coming move.

Additional classic chart patterns
Chart patterns basically fall into two groups:
• Those signaling a reversal in trend
• Those signaling a continuation in the prevailing trend
Reversal patterns include the head and shoulders, double tops and bottoms, rounding tops and bottoms, and reversal days. Continuation patterns include flags and pennants. Certain patterns are hybrids that can signal either or both; gaps and triangles for example. The following sections explain the classic patterns, which I have found remain valid today.

Additional classic chart patterns
Chart patterns basically fall into two groups:
• Those signaling a reversal in trend
• Those signaling a continuation in the prevailing trend
Reversal patterns include the head and shoulders, double tops and bottoms, rounding tops and bottoms, and reversal days. Continuation patterns include flags and pennants. Certain patterns are hybrids that can signal either or both; gaps and triangles for example. The following sections explain the classic patterns, which I have found remain valid today.

Double tops and bottoms
Double tops and bottoms are reversal patterns, many times associated with major tops and bottoms. Double tops occur when prices rally from an area close to a previous high, but then the market fails, with an inability to continue decisively into the new high territory. I’m trying to be careful in my choice of words because many novice traders believe a double top is valid only if a market falls under the previous top. I’ve found, in practice, that many times double tops are formed when a market just nicks or even at times moves slightly above the previous high and then fails. Think of double tops as the letter M, with the right mast at times a bit lower or a bit higher than the left.
Double bottoms are the mirror image of the tops. Think of them as the letter W. The market makes a major bottom, rallies, fails and holds slightly above or slightly below the previous bottom, and then it reverses.
Figure 8.13. Double top and double bottom The one problem with double tops and bottoms is that they don’t always occur at the top or the bottom. You have to be careful because, many times, you’ll see these in the middle of moves (which obviously doesn’t help in identifying a top or a bottom). As I’ve stated before, there is no holy grail. All you can hope to do is place the odds in your favor, using good money management to cut the losses on the trades that don’t go according to plan. To avoid false signals, it is important to wait until the pattern is completed. This removes some of the profit potentials but also improves your odds. Make sure you look for double bottoms and tops only after a major top or bottom is made and then wait for the market to test the low/high and then rally/break significantly, which increases its validity.
How much is “significant”? Unfortunately, I can’t give you a number, but after you have been doing this awhile, and after studying hundreds of charts, you’ll get a feel for this in various market situations.

Rounding tops and bottoms
Rounding bottoms are sometimes referred to as saucer bottoms

Flags, rectangles, and pennants
Flags, rectangles, and pennants are three relatively common continuation patterns. They generally occur in the first third, middle, or second third of major moves and can be good formations to pyramid from using fairly tight stops.
Rectangles, at times called “boxes,” are formations where the market pauses and proceeds to trade in a tight range. A rectangle is like a consolidation but much smaller in length. Unlike a consolidation, a rectangle occurs after a move is underway—not at a top or bottom. It is generally a price movement that is contained between two horizontal lines, as shown in Figure 8.15.
The upper line of the rectangle is the resistance line, and the lower line is the support line. The plan is not to anticipate but rather to go with the flow. In an uptrend, buy on the break of resistance, and in a downtrend, go short on the break of support. Rectangles basically represent pauses in the major trend; the market remains fundamentally bullish or bearish, but it has to first undergo a “healthy”
round of repositioning or profit-taking before a resumption of the move. Volume generally dries up during this box-like formation and increases on the breakout.
Just like in the neckline of the head and shoulders (explained shortly), many times the market returns to the breakout level after it takes place. Rectangles provide an excellent time to pyramid a winning position. I look to add to profitable positions after the breakout, moving my stop on the total position to above or below the opposite boundary of the box.
One drawback of rectangles is that they are continuation patterns, which at times can revert into reversal patterns. Once again, be warned: Keep an open mind and be nimble.

A flag is basically a rectangle whose boundaries slant upward or downward. The boundaries are parallel, like a rectangle. The “flag” is, again, a pause due to profit-taking by the weak hands, a rest stop before the train once again rolls out of the station.
Flag and pennant The general rule is that the slant of a flag will run opposite the direction of the major price trend, but this isn’t always the case. Actually, contrary to popular belief, I’ve found that many powerful moves out of flag congestions come from
those slanting in the direction of the major trend.

Triangles
Triangles are congestion patterns that can signal either continuation or reversal. They come in three distinct varieties: symmetrical triangles, ascending triangles, and descending triangles. A symmetrical triangle has an upper line that slopes downward (it looks like a
down trendline) and a lower line that slopes upward (it looks like an up trendline). These lines converge at a point. With all congestion patterns, there is a war going on between the bulls and the bears. Within a triangle, the sides are matched fairly evenly, with neither side winning. (See Figure 8.18.) However, at some point, as time goes forward, one side will win. The market will break out of the triangle, and this is the time to act because the breakout signifies the direction of the next major move.
Figure 8.18. Symmetrical triangle The general rule is that the most valid signals will come when the market breaks out prior to reaching the end, termed the apex. The best breakouts generally occur approximately two-thirds of the way along with the length of the triangle. Also, as with most of the other patterns, the volume should increase on the breakout. You know you’re caught in a false move, a “trap,” when the market
trades back into the triangle after the breakout and all bets are off when it moves over to the other side.
Ascending triangles and descending triangles are like their symmetrical brethren, except they work toward a breakout in the direction of their respective names. The ascending variety has a flat upper boundary with a rising lower boundary that can be defined by an up trendline. The bulls are able to support the market at successively higher lows, while the bears are making a stand at the upper resistance level, with the result more likely to be a breakout to the upside. This is generally a continuation pattern, most likely to be seen during a major up
trend. The descending variety is the mirror image, with a lower horizontal support line and successively lower highs that can be connected by a down trendline. Examples shown in Figure 8.19.
Figure 8.19. Ascending (part a) and descending (part b) triangles Volume characteristics match the other patterns; many times, the volume will
jump on the breakout. The bigger the triangle, the bigger the move to follow is likely to be.

Gaps
A gap occurs when a commodity opens at a price higher than the high of the previous day or lower than the low of the previous day. By definition, the gap remains intact if it’s not “filled” during the trading session. In other words, on a “gap-up day,” the market never traded low enough to equal or exceed the high of the previous day on the downside. On a “gap down day,” the market was never able to trade high enough to equal or exceed the low of the previous day on the upside. Gaps can be identified fairly easily on a daily bar chart. The trick is to determine which of the four—common, breakaway, measuring, or exhaustion—you are looking at.

Common gaps: The majority of gaps are more likely to be filled sooner than later. Most daily gaps are filled during the same trading session, and of those that aren’t, more often than not, they are filled within a day or two. Because these are the most common variety, they are known as common gaps. They might occur, for example, as a result of a government report, but the news usually is not strong enough to change the major trend, and the gap is filled quickly. Common gaps are seen quite often in thin, or low-volume, markets and are rarely significant. The trick is to be able to differentiate the common variety from the other three. The other three varieties are important technical tools that have powerful forecasting abilities.

Breakaway gaps: A breakaway gap develops at the beginning of a new move. An upside breakaway gap occurs when prices jump up from a bottom, often from some sort of congestion area. A downside breakaway gap occurs when prices jump down from a top, also many times from some
sort of consolidation. A breakaway gap is significant because it signals a change in the supply and demand balance of the market in question. The pressure to push a market to the next level is so great that the market literally has to leapfrog to this new level, effectively trapping many market participants on the wrong side. It is those trapped on the wrong side who will eventually add fuel to this new fire as they liquidate. The shorts trapped under the upside breakaway gap are all holding positions at a loss and will eventually need to find a place to cover. Some of them will hope for a break to cover, but it won’t come. Alternatively, numerous longs will be trapped above the downside breakaway gap, and at some point, they will be selling out. The inevitable result is more downside pressure.
How can you tell a breakaway from a common gap? Common gaps are filled fairly quickly. Breakaway gaps are not filled for a long time,
sometimes never for the life of a contract. They signify the start of a new and major trend move. Many times they form out of consolidation or during blow-off highs or lows. The breakaway day is accompanied by greater-than-normal volume, usually at least 50% greater than the average volume of the preceding two weeks. These are significant and powerful tools that you should be alert for constantly. Particularly, watch for them when a market appears to be “cheap” or “expensive.” The market could be basing for a major bottom or climaxing for a major top. 3.

Measuring gaps: A measuring gap is found at approximately the midpoint of a powerful trend move. Such a gap forms one day, often on news, but unlike with a common gap, the market continues on its way without filling the gap. Once again, volume is usually large. Measuring gaps serve to trap many players who are on the wrong side even more deeply in the muck, and these traders provide some of the fuel for the next leg up or down. The interesting thing about these gaps is that they tend to occur when a move is just about half over. If the breakaway came at 100 and the measuring is at 140, you can project that this move will run to about 180. The measurement rule is certainly not written in stone. At times, there will be more than one measuring-type gap in powerful moves, perhaps one at 33% of the move and another when the move is about 60% to 67%. However, the 50% rule is usually pretty close, so it can help you determine approximately where you are in the move. Exhaustion gaps can do this, too. (See Figure 8.20.)

Exhaustion gaps: An exhaustion gap forms near the end of a move. In a major uptrend, the market gaps up to new highs, generally on bullish
news. In a major down trend, the market gaps down to new lows, perhaps on new bearish news, sometimes based on final panic liquidation. In both cases, many times these gaps follow wide-ranging or limit-type moves. In markets that still have limits, the exhaustion day might even trade at the limit at some point in the direction of the major trend. Unlike with the other gaps, however, this is the beginning of the end. The market has run out of steam, even though most of the participants do not realize it on that day. One way to explain this is that on the day of an upside exhaustion gap, the last of the weak shorts have thrown in the towel and are covering their positions. The last of the “uniformed” longs are entering the party believing this market still has a long way to go. However, the news is always the most bullish at the top, and the market is satiated. High prices are starting to ration demand, and supply is beginning to come out of the woodwork. With a downside exhaustion gap, the last of the under margined longs have given up. Many times, panicky conditions prevail as the red ink flows. This, too, is the beginning of the end because low prices have begun to stimulate demand.

How can you determine whether a gap is of the exhaustion variety? Unlike with breakaway or measuring gaps, an exhaustion gap will be filled fairly quickly. More commonly, the market will churn for three to five days, but it will generally be filled fairly quickly—sometimes the next day. Many times, the high of the exhaustion top day will not be exceeded, or with a downside, there will be no lower lows. The volume will be high, but it was probably high in the days preceding the exhaustion day, too. Like breakaway gaps, exhaustion gaps are powerful indicators. Keep your exhaustion gap antenna up when a market becomes wild-eyed after a long run-up or panic-stricken after a long run down. Remember, it is always darkest before the dawn and brightest just before the sun starts to recede.

Finally, no discussion of gaps is complete without mentioning the island formation. Islands can be formed in part by either exhaustion or breakaway gaps. An island bottom is formed by a gap down, price action at a basing level, and then a breakaway gap up. An island top is formed by a continuation of exhaustion gap up, some price action at new highs, and then a breakaway type gap down (or vice versa). Islands are easy to spot because they look like islands in the sky (or the sea). They are rare but powerful, and you’ll know one when you see it! Figure 8.21 is a daily cocoa chart illustrating examples of each variety, all occurring within a two month time period.

Five rules for trading gaps
The following are five useful rules for successful gap trading:
1. The majority of gaps are common and will be filled. Do not look for significant gaps at nonsignificant times. If market gaps on minor news, low volume, or what doesn’t appear to be a major top or bottom, assume that it will be filled. Scalpers can fade these common gaps and look to take profits when they’re filled. If a gap is not filled fairly quickly (within two to seven trading days), begin to treat it as a significant gap (either a breakaway, measuring, or exhaustion gap—depending on where the market is in its cycle).
2. When a market is forming a long base, place a buy stop above the base to catch a breakaway-type move. Many times, breakaway gaps occur when they’re least expected; at times, they occur on no news. I’ve observed on breakaway-up days that the lows are generally registered right at the open. If you are stopped into a new long position in this way, place your sell stop at the low end (the fill) of the gap. If it is any good, it should not be filled, and you should be in close to the lows for maximum potential profitability.
3. Measuring gaps offer an excellent opportunity to pyramid a position. If you spot a measuring gap and are already in on a base position, it is time to double up and move your stop loss on the entire position to the fill of the measuring gap. Your average price is better than the market, and your risk on the new “add” is minor. When they work, you have a lot of profit potential remaining on the new, larger position.
4. Never anticipate exhaustion gaps—wait for them to be filled to take a new position. Exhaustion gaps occur in the final stages of a major move. This phase is almost always volatile, and it is extremely difficult to pick a top or bottom. It is only after the exhaustion gap is filled that you can define what your risk is and what it truly was exhaustion. I have seen occasions when the bullish sentiment is so frothy that it forms exhaustion but still can work higher for days or weeks before it’s filled.
5. When you see a significant gap (a breakaway, measuring, or exhaustion gap), act! This is not the time to hesitate; it is the time to act aggressively. Just do it! If you wait, you’ll be left holding the bag. Significant gaps generally offer a good reward to risk because you can define fairly closely what your risk should be.

I’ve identified three major volume rules:
1. In a major uptrend, the volume will tend to be relatively higher on rallies and lower on declines or trading ranges (consolidations).
2. In a major downtrend, volume will tend to be relatively higher on declines and lower on rallies or trading ranges (consolidations).
3. Volume will tend to expand dramatically at major tops and bottoms. Major bottoms can be characterized by climax-type selling. Blow-off tops will be associated with climatic volume, too.