Rally Following Completion of Broadening Top

We have referred in the paragraph above, as well as on page 136, to the partial recovery
which usually follows the completion of a Broadening Top pattern. This rally, we
have noted, frequently carries prices about half way back to the level of the last top
or fifth reversal point of the pattern. In the Air Reduction top (see Fig. IV.14) the rally
from H to J retraced almost exactly half the decline from G to H. In the US Steel top
(Fig. IV.15) the Broadening Top formation was completed on March 1 when the price
touched 53 after having attained 597/8 at the fifth reversal point. The rally on March
2 carried to 563/4, again half the extent of the preceding decline.
Naturally, we cannot expect such a close approximation of the half-way level on
every rally after a Broadening Top has formed nor, for that matter, can we expect a
rally of any extent always to follow promptly after the decline from the fifth reversal
point has carried prices below the fourth reversal. In most cases a rally will
develop shortly after the level of the fourth reversal has been ‘‘broken’’, and in most
cases this rally will carry prices about half way back, but the exceptions are frequent
enough to suggest the practical danger of counting
on it, and to advise the immediate sale of any ‘‘long’’
stock as soon as the Broadening Top is completed
without waiting for a rally. When it comes to taking
a ‘‘short’’ position, however, a more conservative
and frequently more profitable policy is to wait for
a rally and to sell when prices have recovered about
40% of the preceding decline which completed the
Broadening Top. Since these rallies are usually very short-lived, it is also good policy
to place an order with one’s broker to sell short at the specified price – the level
to which the hoped-for rally might be expected to carry – as soon as the requirements
for a Broadening Top formation have been carried out and before the rally has
actually started.