This pattern can be applied to any equity. Chart patterns represent human behavior and that is a constant among all asset classes.
Point 1 - The First Test - The New High
Price reaches a new high and pulls back when investors take profits.
Point 2 - Second Test
New buyers come in and price tries to attack the highs for a second time. Often this attack fails, because there just aren't as many buyers as before, and people who didn't get a chance to sell at (1) now have a chance, so they sell and run to the bank.
A has now formed between point 1 and 2. This downward basically shows us that price is making lower highs. What we want is to see a higher high, which is an uptrend. Pretty easy right?
Well we can't see a higher high until we break out of the downtrend, meaning, we have to break out of this .
Point 3 - Third Test
People start to watch the as well, so it becomes a self-fulfilling prophecy and the price starts to get stuck under the .
In general, we know that we have less buyers here than before. So here we ask the question, will we ever breakout of this downtrend? Or will we crash down because the buyers are disappearing
Point 4 - The breakout
Now we have the answer. This is VERY OFTEN the fail or succeed point of a pattern like this. After 1,2 and 3 tests of the downtrend, either buyers will give up and go home, meaning sellers take over and price breaksdown OR new buyers come in from somewhere, or maybe they were just waiting for lower prices to buy. Whatever the reason, they step in and start buying. We breakout of the downtrend line, and that inspires more buyers to come in because they were the ones waiting for the . And then price starts moving fast because everyone wants to buy. THen the media says "this is a great buy" and boom more people come in.
Until finally....we reach a new high price (1) once again. Investors take profits and the whole cycle repeats itself.
If we IDENTIFY the patterns, and RECOGNIZE the breakout points, then we can be prepared to jump in at a favorable point.
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