In this example, using the Lucent Technologies daily chart, from the peak of on April 7, a consolidation began. Note that volume and ADX began dropping as price formed a triangle. On May 12, LU tried to break the downtrend line up to that point, the grey line, on volume. It was met the next day with selling and formed a key reversal day, by going higher intraday, but closing lower than the close on May 12. Breakout players were burned as LU fell back into the triangle and the downtrend line was adjusted to a new position, the blue line. On June 4 LU tried to break the downtrend line again on volume but the next day, it was met with sellers again. Note the ADX had gone sideways rather than down, as the lack of movement to the downside, combined with the upward movement of the bars began to affect the ADX calculation.

LU pulled back again toward the moving average, making only "down" and "inside" bars until June 15, when it traded in the narrowest trading range since June 4. Note volume was contracting on this pullback, forming a nice bull flag, as flags are called when the trend is up. As a test of support at the 20-day EMA approached, the moment of truth came for LU. On June 16, LU broke the downtrend line of the bull flag on volume. ADX moved up as the emerging uptrend took hold, with only three "down" days in between, on June 22, July 7 and July 13.

In this example, the S&P closed on its low the day before. In overnight trading on Globex, the high was 1296.60 with a low of 1283.60. As many traders consider these points to be important support and resistance levels, we label them as "pivot" points, along with the low from the day before at 1283. Clearly the S&P was in a downtrend, but it opened gap up (Globex data is not on this chart) and made three 5-minute "up" candles (higher highs and higher lows relative to the bar before). We began the day by drawing a horizontal line at 1283, with a potential Trader Vic 1-2-3 setup.

When the move reached resistance overhead (supplied by the Globex high at 1296.60 AND the 20 period exponential moving average at 1297.44) and could go no higher, sellers showed up. When the low of the third "up" candle at 1293.50 (formed a white shooting star at the arrow) was broken it was the signal to get short with the expectation that the low at 1283 would be tested. The Holy Grail sale was set up.

The trade was to get short immediately upon breaking 1293.50 with an initial stop loss at 1295.80, the morning's high, in anticipation of a test of the low at 1283. The risk was 2.3 points vs. a 10-point reward on a test of the bottom, a ratio of better than 4:1. Using a conservative trailing stop, one that is placed at the top of each "down" (lower high and lower low relative to the bar before) candle, we would close out the trade on the test of the low, when it would go no lower.