V.18:8 (94-97,100):Price Patterns, Part I by Martin J. Pring

Price Patterns, Part I by Martin J.Pring

This veteran market analyst takes a look at the principles of price formation, one of the basics of technical analysis.

In my recent articles, I have covered many basics of technical analysis, ranging from peak and trough analysis all the way to moving averages. What I haven't covered is one of the most widely used concepts of technical analysis: price patterns. This time, I'll take a look at the principles of price formations, together with some of the most common varieties. Next time, I'll examine one- and two-day patterns, because they can be extremely useful for short-term traders.

In most charts, you'll find that prices rarely reverse on a dime; rather, they experience clearly definable trading ranges prior to experiencing a trend reversal. Figure 1 shows such an example. In the left-hand part of the chart, the price rallies and then loses upside momentum as a battle between buyers and sellers gets under way.

Often, it is possible to construct two horizontal trendlines to mark the top and bottom of the range. Every time the pric rallies to the upper line, buyers are scared off by the higher price and selling pressure increases. Then, as it falls to the lower line, buyers are attracted,but sellers, who naturally want a higher price for their goods, withdraw their offerings, so the price bounces again. Eventually, sellers win this battle as the price slips decisively below the lower end of the range. The charting activity that separates the uptrend from the downtrend can be contained by two parallel trendlines known as a rectangle.