As of 11/20/2024
Indus: 43,408 +139.53 +0.3%
Trans: 17,002 -26.31 -0.2%
Utils: 1,055 +1.25 +0.1%
Nasdaq: 18,966 -21.33 -0.1%
S&P 500: 5,917 +0.13 +0.0%
|
YTD
+15.2%
+6.9%
+19.7%
+26.3%
+24.1%
|
 46,000 or 43,000 by 12/01/202418,000 or 16,600 by 12/01/20241,075 or 1,000 by 12/01/202420,000 or 18,400 by 12/01/20246,100 or 5,800 by 12/01/2024 |
As of 11/20/2024
Indus: 43,408 +139.53 +0.3%
Trans: 17,002 -26.31 -0.2%
Utils: 1,055 +1.25 +0.1%
Nasdaq: 18,966 -21.33 -0.1%
S&P 500: 5,917 +0.13 +0.0%
|
YTD
+15.2%
+6.9%
+19.7%
+26.3%
+24.1%
| |
|
46,000 or 43,000 by 12/01/202418,000 or 16,600 by 12/01/20241,075 or 1,000 by 12/01/202420,000 or 18,400 by 12/01/20246,100 or 5,800 by 12/01/2024 | ||
Revised and expanded: 5/13/21
Price follows trends. When you draw a down-sloping line along the price peaks, price often touches the line and falls away without piercing it. The line is called a trendline because it shows the price trend.
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Down Sloping Trendline Chart Pattern
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| 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 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. |
| Spacing | Widely space touches (median 13 days between touches) suggest a more powerful move post breakout: 52% (more touches) versus 50% (fewer touches). |
| Length | Long trendlines (more than the median 48 days) lead to more powerful rallies after the trendline pierce: 52% (longer than median) versus 50% (shorter than median). |
| Slope | Shallow trendlines lead to more powerful moves after the trendline pierce (median slope: 0.05 (not degrees), 56% for shallow, 46% for steep). |
| Volume | A downward volume trend results in a more powerful rally after the trendline pierce: 52% (falling volume) versus 50% (rising volume). |
In each of the above categories, I examined 3,274 trendlines in bull markets and evaluated the price performance after price closed above the down-sloping trendline. I tracked price until it reached the ultimate high (peaked and dropped by at least 20%). The move from the trendline breakout price to the high price was the measure.
Use the measure rule to predict how far price will rise after an upward breakout (a price pierce) from the trendline. The figure 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 56% 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 56% to get 1.12. Suppose the breakout at point B is at 11. That would give a price target of 12.12 (11 + 1.12).
If you use the start (top) of the trendline, price reaches it 77% of the time. So the start of the trendline can act as an easy-to-find target.
What happens after the breakout from a down-sloping trendline? Let's use the figure on the right and data to find an answer.
Both trendlines slope downward and price stages an upward breakout at A (in both lines). That's the first place where price closes above the trendline.
Notice that price doesn't rise much (to B) before tumbling to C (in both lines, respectively). Looking at many trendlines shows a similar pattern, where the trend after the breakout doesn't amount to much.
To avoid the situation shown by the two trendlines, look for a shallow inbound price trend.
I noticed a relationship between the slope of the inbound trend and performance. Flat or nearly flat inbound trends led to better performing trendlines. A check of the data confirmed this observation.
The first rule of better performance is to look at the slope of price before the start of the trendline. If it looks flat or nearly so, then expect better performance after the breakout from the trendline.
If you're hard core, then the slope from the trend start to the start of the trendline should be between -.007 to .05. Trendlines within that range showed gains averaging 56%. Outside of that range and the gain dropped to 47%. That's a substantial difference.
To calculate the slope, find where the trend starts and the trendline starts, then use the closing price for each. Plug the information into the following formula:
Slope = (TrendStart - LineStart)/(Date of TrendStart - Date of LineStart). To put the formula into words, it's the change in y divided by the change in x on a price chart.
After price breaks out upward from a trendline, 59% of the time, a throwback will occur. It's best to assume one will happen and price will attempt to return to the trendline. Using numbers, price rises an average of 5% in 9 days before turning down on the return journey. It takes a total of 14 days (after the breakout) to complete the throwback move. After a throwback completes, the stock rises 81% of the time.
In both trendlines shown in the above figure, price didn't recover but continued lower to C.
The following table shows failure rates for down-sloping trendlines.
| Failure rate: | 5% | 10% | 15% | 20% | 25% | 30% |
| Failures: | 13% | 24% | 32% | 39% | 45% | 50% |
I counted the number of trendlines with moves to the ultimate high and sorted them into percentage columns. For example, I found that 13% of the trendlines saw price climb no more than 5% after the breakout. I call that column a "5% failure." Another example: 24% of the trendlines see price climb no more than 10%. Half the trendlines will fail to see price rise by 30%.
Using the numbers, you can get a sense of how price behaves after the breakout. You'll have a throwback half the time and then price begins a recovery. The average rise is 51% with a median rise of 30%. Those numbers come in a bull market from 3,274 trendlines taken from 645 stocks, with data from February 1991 to April 2021. Each pattern needed to be above $5 per share.
-- Thomas Bulkowski
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