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Now take the analysis up to the latter part of 1989. At that point, the trader should have clearly recognized that the bull campaign from the October 1987 low was unfolding in the same general pattern as the bull campaign from the 1981 low into the 1986 top. The bond market exhibited similar pattern characteristics at important resistance levels.

In the latter part of 1989, we can suspect the market was in a position similar to the market following the 1986 high. If the form of the market activity was to be fulfilled in the same manner as the activity following the 1986 high, the trader could anticipate the August 1989 high would not be exceeded and, once the market did finally break below the consolidation levels, a sharp decline would probably follow that would either correct the advance from the August 1988 low or from the October 1987 low. However, markets do not always fulfill our expectations, which is why we must have trading strategies that incorporate the shorter-term price patterns as well as the time dimension.

The daily chart clearly demonstrates the blowoff top into the August 1, 1989, high (Figure 3). This top was preceded by a sharp advance to new highs that culminated in an exhaustion gap on August 1 and a close below the gap two days later that confirmed the top. The market then made a typical ABC-type correction, followed by another sharp rally that tested the August 1 high. The nature of the test of the August 1 high on October 16 was an important clue to the position of the market. On October 16 the market made a very wide range day, exceeding the August 1 high intraday, but closed near the low of the day, well below the prior swing high resistance level, an indication of weakness at this high price level.

For the next two months, the market traded in a tight trading range. While we have identified the market activity at this point as being very similar to the pattern from a longer-term perspective of the market activity going into and following the April 1986 campaign high, we can never be certain whether this is a distribution period whence prices will eventually make a significant correction or an accumulation period at major resistance that will be followed by a breakout to significantly higher levels.