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 an up-sloping trendline along
the price valleys. That way, when the trend changes from up to down, you’ll know with a trendline pierce. The numbers
in the above chart show price touching the trendline. |
|
Touches |
The more touches a trendline has
the more powerful the move after a trendline pierce. |
|
Spacing |
Widely spaced touches (over the median
28 days each) suggest a more powerful move postbreakout. |
|
Length |
Long trendlines (more than the median
137 days) are more important than short ones. They lead to more powerful declines 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 |
An upward volume trend results in
a more powerful drop after the trendline pierce. |
I examined 199 trendlines and evaluated the price performance after price closed
below the up-sloping trendline. I tracked
the price move until it bottomed and then climbed by at least 20% (a trend change).
The move from the trendline breakout price
to the low price was the measure.
For example, I found 141
trendlines with 4 or fewer price valleys touching the trendline. Price after the
downward breakout dropped 16%. This compares
to a drop of 18% from 58 trendlines with more than 4 touches. I concluded that the
more touches, the more powerful the decline
after the trendline breakout, although the results are close. 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 tumble after a downward breakout (a price pierce) from the
trendline. The figure to the right shows an up-sloping
trendline with price breaking out downward at point B.
From the breakout, find the prior minor low trendline touch. I show
it as point A. Measure the widest distance between those two points (re, A and B),
measured vertically. In this case, that’s the distance
from C to D. Multiply that distance by 63% because that’s how often this
method works when a full height is used, and
project the result downward from the breakout price (B) – the point where price
pierces the trendline.
For example, if the high
at C is 10 and directly below that at point D, the trendline is at 8, the
difference is 2. Multiply this by 63% to get 1.26.
Suppose the breakout at point B is at 9. That would give a price target of 7.74 (9
– 1.26). If the projected decline
is less than 0, ignore the result.
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