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It is important to note that the market is a day-to-day trading affair. As each day's trading occurs, the relationship between the current price action and the past price action will continue to evolve. In Figure 1, the market is in an uptrend that deteriorates into a trading range at point A. When the decline reaches point C, the lower price level attracts demand that checks the decline by absorbing the available supply, and consequently, prices are marked higher.

From this point, the best evidence of underlying strength would be if the market held the gains (point C) on quiet volume. The ability to hold the gains indicates that large participants are not waiting for the one-day rally to be concluded and are offering a large amount of supply at the better price created by the rise in the price. If large interests had wanted to liquidate their positions, the rise in price would provide the opportunity to sell.

When sideways price motion occurs amid a quick runup or decline, the trading range many times will adopt the form of a flag or a pennant.

With this sign of demand and the indications of a lack of supply, market players are encouraged to reenter the market and bid prices up to a level to challenge the highs of the trading range (point D). Another expansion in volume should accompany this rally, especially as prices moved to new highs. After the upper limit of the trading range is penetrated, the market should hold onto the gains. The market should stabilize at this point, with the volume decreasing. This is another sign that the market is still held in control by bullish strong hands.

If the technician understands the basic relationships between volume, price action and the trading range, other descriptive chart patterns that are variations of the basic trading range are also available. It is these chart patterns that provide insight into the flow of trading activity.