The Cupola and the Decline

Once the advance from the First Floor Roof (the Second Floor Wall) is complete, the average pulls back slightly. Price can then be expected to make a run to yet another new high. “Normally, the average gains less on the last leg of a major advance (despite continued high volume) than on most of the previous legs. If this is not true, the market is not making a top.” In other words, the advance slows down as it gets older. The new high is not held and the average quickly pulls back again, retracing the entire gain. Once the new and final high has been passed and prices start to drop, they usually do not drop very far before they start to rally again and form a clearcut right shoulder or the right side of the second-story rooftop (see Figure 5.10). A horizontal line drawn through the left and right shoulder of the Cupola suggests the roof of a second story. These movements suggest a cupola or a small dome on the top of a building, hence the formation is called a Domed House. The entire 3PDh formation is capped by a small head-and-shoulders pattern that resembles the cupola of a house.

Figure 5.10. Cupola.