A Significant Sell Signal
The most significant sell signals often take place following market advances that appear significant and favorable at first, but that rapidly fail. In this regard, you may want to recall that every major market decline originates from a market peak and that every bull market originates from a significant market low point. Here is a sequence of events that frequently takes place as the stock market reverses from a bullish to a bearish trend:
1. The stock market enters into a trading range.
2. A breakout takes place from within the boundaries of the trading range to a level above the trading range. It appears that a market advance is getting underway
3. The advance ends almost immediately, indicating that the upside breakout was falsely deceptive. Prices fall to back within and tlien to below the lower boundary of the trading range in question.
4. The penetration of the lower boundary of the trading range when such a sequence takes place is generally followed by a sharp and extended market decline.
This type of pattern exists on intraday charts as well; day traders are advised to look for it.