Identification Guidelines
|
Characteristic |
Discussion |
|
Log scale |
Use the logarithmic scale. Price
will signal a trend change sooner on the log scale than on the arithmetic scale. |
|
Minor highs |
Draw a down-sloping trendline along
the price peaks. That way, when the trend changes from down to up, you’ll know with a trendline pierce. The numbers
in the above chart show price touching the trendline five times. |
|
Touches |
The more touches a trendline has
the more powerful the move after a trendline pierce. |
|
Spacing |
Widely space touches (over the median
29 days each) suggest a more powerful move postbreakout. |
|
Length |
Long trendlines (more than the median
139 days) are more important than short ones. They lead to more powerful rallies after the trendline pierce. |
|
Slope |
Shallow trendlines (up to 45 degrees)
are more reliable than steep ones (over 60 degrees). Again, they lead to more powerful moves after the trendline pierce. |
|
Volume |
A downward volume trend results
in a more powerful rally after the trendline pierce. |
In each of the above categories,
I examined over 200 trendlines and evaluated the price performance after price
closed above the down-sloping trendline. I
tracked price until it peaked and dropped by at least 20% (a trend change). The
move from the trendline breakout
price to the high price was the measure.
For example, I found 85 trendlines
with 3 price peaks touching the trendline. Price after the breakout climbed 33%.
This compares to a rise of 38% from 63 trendlines
with 4 touches, 57% rise from 40 trendlines with 5 touches, and so on. I concluded
that the more touches, the more powerful
the rally after the trendline breakout. Consult my Trading Classic Chart Patterns book
for more information on the results.
The Measure Rule
Use the measure rule to predict
how far price will rise after an upward breakout (a price pierce) from the
trendline. The figure to the left shows a down-sloping
trendline with price breaking out upward at point B. From the breakout, find the
prior minor high trendline touch. I show
it as point A. Measure the widest distance between those two points, measured
vertically. In this case, that’s the distance
from C to D. Multiply that distance by 80% because that’s how often this
method works when a full height is used, and
project the result upward from the breakout price – the point where price
pierces the trendline.
For example, if the low at
C is 10 and directly above that at point D, the trendline is at 12, the difference
is 2. Multiply this by 80% to get 1.60.
Suppose the breakout at point B is at 11. That would give a price target of 12.60
(11 + 1.60).
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