Broadening Bottoms
Price trend is downward leading to the formation.
Megaphone appearance with higher highs and
lower lows that widen over time. Breakout is
upward.
Reversal or continuation Short - term bullish reversal
Surprising findings Throwbacks hurt performance. Tall patterns
perform better than short ones; narrow ones
perform better than wide ones. Patterns with
falling volume and a random shape outperform.
Price trend. As mentioned earlier, a declining price trend precedes a
broadening bottom. Even if prices rise just before the formation begins, ignore
it. It is still a bottom. This arbitrary designation also makes intuitive sense: A
bottom should appear at the end of a downtrend, not when prices are climbing
to the moon.
Shape. The shape of the formation is distinct. It reminds me of chaos
theory where small disturbances oscillate back and forth, then grow unbounded, wreaking havoc. In the stock market, price reaches a new high then
crosses over and makes a new low, creating the broadening pattern. When you
draw a trend line across the minor highs and another connecting the minor
lows, the formation looks like a megaphone
Trend lines. The two trend lines drawn across the minor highs and lows
are important. The top trend line should slope up; the bottom one should
slope down.
Touches. A broadening bottom needs at least two minor highs and two
minor lows to be a valid formation
Volume. There is nothing magical in the volume trend.
Breakout. The breakout point is difficult to identify in a broadening formation as it develops. I look for the place where price pierces the up or down
trend line or makes an extended move
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