Markets continually exhibit three distinct phases of congestion, trending, or random behavior.

1. Congestion: Market is at an equilibrium level and buyers and sellers agree on price.

2. Trending: Perceptions and fundamentals change and the market moves higher or lower.

3. Random: Market is in disarray with no discernible congestion range or trend.

Markets trend when fundamental factors cause significant variations in supply and demand, or when people's perceptions change. These changes cause the market to trend higher or lower. Markets go through congestion phases when both supply and demand forces are in equilibrium, and prices consequently become mired in a trading range. Markets manifest random behavior when there is great un-curtainty, and no dear supply or demand force materializes. One of the most important objectives of a trader is to determine the current state or phase of the market.

Congestion markets have fairly well defined equilibrium levels, which the technician terms support and resistance levels. July 87 silver trades within the congestion range of 5500 to 6000 level from December to March. Buyers and sellers have a range where silver is considered fairly valued, so the market does not stray too far from this level. Congestion areas are also termed consolidation areas.

Trending markets are characterized by strong price moves which break out from previous congestion ranges. In late March, silver breaks out from the tight trading range and changes from a congestion pattern to a strong upward trending phase. The market has changed and buyers now dominate, so that the price moves higher. The opposite effect of trending to consolidation occurs where the June 87 S&P500 is in a strong upward trend. It tops out In March and begins a congestion phase.

Random markets are different than congestion or trending markets, because there appears to be no order to a random market. April 91 gold in a random phase, in October, it breaks below the low at 390, set in September, but does not continue lower but instead reverses and breaks out in late December at 400, above the highs previously set in November. It does not follow through, and reverses trend again by breaking below the lows of October. There is no clearly defined congestion range and even less of any significant trend. Although the author flatly rejects the efficient market hypothesis, he is painfully aware from real trading experiences of the sometimes random character of the market.

The reason every trader must determine the state of the market is that it is theoretically possible to make money in the first two phases but mathematically impossible in the third phase. For example If the market is in a congestion phase, selling the tops and buying the bottoms should result in profitable trades (easier said than done!). If the market is trending, buying in a bull trend or selling in a bear trend should result in profitable trading. However, if the market is in a random phase, there is no clear technique to employ, since either following or fading a trend will not necessarily yield winning trades. In fact, the only known way to effectively deal with random markets is to stop trading for a while and take a long vacation! One of the purposes of technical analysis is to identify these different states.

There is a common perception that markets are in the congestion or random phases as much as 80% of the time (more in some markets (and less in others). This is not easy to measure quantitatively and verify; nevertheless, certain markets such as the currencies have historically manifested much broader and longer-lasting trends.