How to Interpret Price Bar Series
When evaluating the stock market, most of the time, a series of price bars that show higher highs with higher lows or a series of price bars that show lower lows with lower highs does mean that a market trend is emerging, even if the close is not yet in the right position to confirm it.
Higher closes are the logical outcome of new highs if they persist in a series, just as lower closes are the outcome of a series of lower lows. The mind of the stock market isn’t hard to read. Market players start wondering why new highs or lows are occurring. They know a new high or a new low can occur only if some trader decides to buy or sell there — so what does he know that other traders don’t know?
New highs and lows arouse emotions in the following ways:
A new high or low makes market participants nervous. A sufficiently large number of new highs triggers greed — better buy now so that you don’t miss out, even if you don’t know why the new high is occurring. The result is a higher close while buyers pile in near the end of the day.
New lows scare just enough traders that they sell their positions. This situation can happen, even in the absence of any fresh news that would justify the selling. Sellers are unwilling to hold a falling asset and so sell, causing a lower close.
But sometimes it’s the other way around — you get a series of up days without getting a series of higher highs. In other words, the close today is higher than the close yesterday, but the high today isn’t higher than the high yesterday. Pay attention anyway because new highs may start to appear.
These new highs may happen solely because so many people are aware of the meaning of up days and down days. In other words, so many people look at technical indicators — and a series of up days or down days is a basic indicator — that they anticipate higher highs or lower lows. By acting on that expectation — buying or selling ahead of the actual appearance of a higher high or lower low — they make it happen. You can observe this type of self-fulfilling prophecy often in technical analysis.