5
52ATLANTIC REFINING AFI48444038363432302826Sales100’s25020015010050
1944
1945
1946
1947
FIGURE 147. A series of Intermediate Trendlines drawn to illustrate the “basic”principle (see below) on a weekly chart of Atlantic Refining, extending from January1944 through August 1947. Observe that each up trendline required two distinctBottom points to determine it, and each down trendline, two Tops. In some cases,the two determining points were formed only a few weeks apart, as in August andSeptember 1945. The Bottom points that fixed the early 1946 up trendline, on theother hand, were months apart — February and June.Many other experimental lines might have been drawn on this chart originally,including several uptrends whose Intermediate authority was questionable becausethey were “too steep” — as in early 1944, late 1945, and early 1946.Only final trendlines are shown here.There are here also some interesting examples of Pullbacks (after trendline penetration) which are discussed on the following pages. Note July 1944, April 1945,September 1945, and May 1947.
How Trendlines Are DrawnBut first, how are trendlines drawn? A straight line is mathematically determined by any two points along it. In order to draw a trendline, therefore,we require two determining points — two established Top Reversal pointsto fix a Down Trendline and two established Bottom Reversal points to fixan Up Trendline. The principle here is the same as the one we laid down inour specifications for drawing Triangle boundary lines in Chapter 8. The factis that boundary lines of Triangles and Rectangles, as well as necklines ofHead-and-Shoulders Formations, are simply special types of trendlines.
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Suppose we start with a Major Bottom point and describe how a seriesof Up Trendlines might develop therefrom. To make this first illustrationsimple, let us assume that the Bear Market Bottom in our stock consisted ofa Rectangle area between 6½ and 8, and that the last move in this formationarose from the 6½ level, broke through the pattern’s Top at 8, and proceededto 9. From 9, prices reacted to 8 and then headed back up again. As soon asthis last rally had gone far enough to leave the dip to 8 showing in the clearas a Minor Bottom, we could draw our first Up Trendline because we thenhad two Bottom points, the second (8) higher than the first (6½), to fix itsslope. This would be a Minor Up Trendline. We would rule it in lightly onour chart in pencil, and extend it on up and ahead for, perhaps, a week ormore. (It will help you to visualize our example if you sketch it on a scrapof chart paper.)To proceed, suppose prices push up to 10, then move sideways for a fewdays, or dip slightly, until they have approached and touched, once more,our extended Minor Trendline. Then they start to move up in a third advance,but run into supply again without making much progress, quickly make afourth contact with the trendline, hesitate, and then break down through it.If prices now close clearly below the line, and if, in addition, there has beensome pickup in trading volume evident on the penetration, we may concludethat our first Minor Trend is completed, and that our stock either will buildsome sort of Consolidation Pattern before it stages another advance, or willsuffer a more extensive “Correction” than any of the brief dips it registeredduring its first Minor Upswing.The whole Minor Uptrend we have described as an example in theforegoing paragraphs might well have run its course in 2 weeks, and ourfirst trendline would then have been very steep — too steep, obviously, tohold for any very long period of time. Now, let us assume that a series ofdownward fluctuations produces the more extensive correction which wehave foreseen as one probability following the trendline break, and that thiscarries prices back to the Support Level set up at the Top of the originalRectangle, i.e., at 8. (From our previous Support–Resistance studies, wewould recognize this as a prime “buy spot.”) Assuming that subsequentdevelopments pursue a normal course, prices should not linger long at 8,but should start promptly on a new series of advancing fluctuations. As soonas this becomes evident and the new Bottom at 8 is “in the clear,” we canrule in a new trendline across the original base point at 6½ and the newpoint at 8. This should be, and probably is, an Intermediate Up Trendlinewhich will not be penetrated for several weeks, and maybe for severalmonths, until the Intermediate Advance tops out.Then, if that Intermediate Top takes the form of a Head-and-ShouldersReversal Pattern, our Intermediate Up Trendline may be broken by therecession from the top of the head to the neckline. As a rule, however, thefinal advance in a strong Intermediate Move accelerates far enough awayfrom the extended trendline to leave room (to the right on the chart) for
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807672
1935–1936
6864605652ATCHINSON, TOPEKA, & SANTA FE SF48Sales100’s5040302010OCTOBERNOVEMBER DECEMBER JANUARYMARCHFEBRUARY5 12 19 26 2 9 16 23 30 7 14 21 28 4 11 18 25 1 8 15 22 29 7 14 21 28
FIGURE 148. This 1935–36 daily chart of Atchison illustrates how the latter part ofa long, strong Intermediate Advance may accelerate away from its trendline. (Noticethe action in late January and early February.) Prices dropped back to 66 in April1936 after this Up Trendline was broken at the end of March. Note also that at thepoint where the December 1935 reaction met Support, the trendline coincided witha Triangle apex level. Such “coincidences” appear frequently in technical studies.
considerable pattern construction before the line is again touched and penetrated. Hence, the actual puncturing of the trendline is more apt to occureither on the decline from the right shoulder to the neckline, or at about thesame time as prices break down through the neckline to complete the Headand-Shoulders signal. It is surprising to see how often the two lines, necklineand trendline, are broken simultaneously. In other instances, and there aremany of them also, in which the trendline is the first to be punctured, perhapsshortly after prices turn down from the right shoulder, we do not have towait for a neckline break but can take action at once. Here is one type oftrendline indication which produces a working signal a little earlier, andoften at a much more favorable price level, than is given by the completionof a Reversal Formation.
Arithmetic vs. Logarithmic ScaleBy this time, the more mathematically inclined among our readers must havebegun to ponder the difference between trendlines projected on the ordinary
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or arithmetic scale and on the logarithmic or ratio scale. A series of pointswhich fall on a perfectly straight, up-sloping line on arithmetic chart paperwill, when transferred to a semilogarithmic sheet, produce a curved line thatrises sharply at first and then gradually rounds over. And points which fallon a straight line on a semilogarithmic sheet will produce an acceleratingcurve on an arithmetic sheet, a line which slants up more and more steeplythe farther it is projected.As a matter of fact, this variance is of little or no importance in definingMinor Trends, since they seldom run far enough for the dissimilar characteristics of the two types of scales to become effective. And the same holdstrue for average Intermediate Moves of normal slope. But when it comes tovery long and strong Intermediates, the divergence may become marked,may make a considerable difference in the time and level of ultimatetrendline penetration. Therein lies one of the strongest reasons for usingsemilogarithmic paper in charting stocks for technical analysis. But let uspostpone further discussion of this point until we take up Major Trends, andgo on now with the Intermediate Lines which are much the same on eithertype of scale. And, for the present, let us concentrate on IntermediateUptrends. (Intermediate Moves are emphasized rather than Minor for theobvious reason that the latter are of little practical importance in eithertrading or investing.)To go back to first principles, and granting that price advances trend upin more or less straight lines, it follows that if we can find and draw the linesthat accurately define those trends, they will serve two purposes, as follows:1. When the trendline is broken (i.e., when prices drop down throughit in decisive fashion), it signals that the advance has run out. It callstime for the intermediate-term trader to sell out that issue, and lookfor reinvestment opportunities elsewhere.2. When a small Top Reversal Pattern forms on the chart of an issuewell up and away from that issue’s Intermediate Up Trendline, sothat there apparently is room for the downside implications of theReversal Formations to be carried out before the trendline is violated,then the intermediate-trend trader may well decide to ignore thesmall Reversal Pattern. He can hold on so long as the trendline holds.The advantages of the first-named trendline function are obvious. Thoseof the second, though less obvious to the inexperienced, are equally important to the investor who has learned that it is an expensive practice to switchout of every holding as soon as it shows evidence of a Minor Setback,provided the chance of further Intermediate Advance still exists.To accomplish these purposes it is necessary, as we have said, to findand draw the line that accurately defines the Intermediate Trend, and thento recognize when that line has been broken in decisive fashion. Our earlier
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3634
CRANE COMPANY
CR
1945
HS
S
3230
26Sales100’s125100755025
XD .25
XD .25
28
JANUARY FEBRUARYMARCHMAYJUNEAPRIL6 13 20 27 3 10 17 24 3 10 17 24 31 7 14 21 28 5 12 19 26 2 9 16 23 30
FIGURE 149. Trendlines which defined the short-term swings in Crane Companyin 1945. Note that three Bottoms formed on the first up-line and that the third rally(late February) in this advance failed to reach a line drawn across the earlier Topsparallel to the Basic Trendline. A failure of this sort frequently precedes a break inthe trend. The same thing happened at the end of the second uptrend in late May.“Failures” and the use of parallel or “Return” Lines will be discussed later in thischapter.The downtrend in March assumed Wedge form. Observe how the April 6 reactionmet Support at its previously penetrated Top line. In June, a rally met Resistance atthe previously broken Up Trendline. Such Pullbacks are common. The small ComplexHead-and-Shoulders in June was never completed, since prices did not break downout of it by the required margin.
quick review of how a trendline is constructed did not attempt to cover thesepoints thoroughly.
Tests of AuthorityHere are some of the tests which may be applied to judge the technicalvalidity, the authority, of an Up Trendline:A. The greater the number of Bottoms that have developed at (or verynear) a trendline in the course of a series of Minor Up Waves, thegreater the importance of that line in the technical sense. With eachsuccessive “test,” the significance of the line is increased. A first andtentative Up Trendline can be drawn as soon as two Bottoms haveformed, the second higher than the first, but if prices move back to
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that line a third time, make a third Bottom there and start a renewedadvance, then the validity of that line as a true definition of the trendhas been confirmed by the action of the market. Should a fourthBottom later form on it, and prices move up away from it again, itsvalue as a trend criterion is very considerably enhanced, etc.B. The length of the line, i.e., the longer it has held without beingpenetrated downside by prices, the greater its technical significance.This principle, however, requires some qualification. If your trendlineis drawn from two original Bottoms which are very close together intime — say, less than a week apart — it is subject to error; it may betoo steep or (more often) too flat. If the latter, prices may move awayfrom it and stay high above it for a long time; they may then turndown and have declined well along in an Intermediate Correctionbefore the trendline thus drawn is reached. But if the trendline hasbeen drawn from Bottoms which are far enough apart to have developed as independent wave components of the trend you are tryingto define, with a good rally and “open water” between them, then itis more apt to be the true trendline. Greater weight should be givento the number of Bottoms that have formed on a trendline (Test 1)than to its length alone (Test 2).C. The angle of the trendline (to the horizontal) is also, to some degree,a criterion of its validity as a true delimiter of Intermediate Trend. Avery steep line can easily be broken by a brief sideways Consolidationmove — as, for example, by a compact Flag forming on an advanceof the “mast” type — only to have prices shoot up again in anotherextensive advance. Such steep lines are of little forecasting value tothe technician. The flatter, more nearly horizontal the trendline, themore important it is technically and, in consequence, the greater thesignificance of any downside break through it.But “steep,” as applied to stock trends, is a relative term, and one which,we must frankly confess, defies exact definition. Experience, which can onlybe gained by studying many charts and by actually building and workingwith them over a period of many months, brings an almost intuitive abilityto distinguish between a trendline which is “too steep to hold” and onewhose angle of rise is reasonable and should be maintained until such timeas the trend is actually reversed from Intermediate Up to Intermediate Down.Trend slopes will vary from stock to stock according to their characteristicmarket habits. They will vary also according to the stages of the PrimaryCycle — tending to become somewhat steeper in its later phases. The morechart history you have on any particular issue in which you are interested,the better able you will be to judge its present trend.(The foregoing statement, we might remark, applies to the interpretationof most other technical patterns and phenomena as well as to trendlines.)
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3230COMMERCIAL SOLVENTS
CV
28262422
1946
20Sales100’s25020015010050FEBRUARYJANUARY5 12 19 26 2 9 16 23 2
MAYMARCHAPRILJUNE9 16 23 30 6 13 20 27 4 11 18 25 1 8 15 22 29
FIGURE 150. Intermediate Downtrend and Uptrend in Commercial Solvents in1946. Note the increased volume on the March 30 penetration of the basic DownTrendline (and, at the same time, a breakout from a small Head-and-ShouldersBottom). The drop through the lower parallel at the end of February had no technicalsignificance. The Up Trendline from the March low was broken on June 14, simultaneously with a breakout from a Descending Triangle which, as it turned out, wasthe final Bull Market Top.
One clue to relative steepness is afforded to those who employ theTEKNIPLAT semilogarithmic chart sheet, which has been used for most ofthe illustrations in this book. When projected on this scale, IntermediateUptrends on the daily charts, in the great majority of issues selling in the10 to 50 range, rise at an angle of approximately 30 degrees to the horizontal.Some will be a trifle flatter, some a trifle steeper, but it is surprising to seehow often the trendline falls very close to the 30-degree slope in stocks ofaverage volatility and activity. Thin, highly speculative issues and heavyinvestment stocks offer exceptions, the former usually steeper and the latterflatter. The semilogarithmic scale has the virtue, of course, of reducing allmovements, regardless of price level, to a ratio or percentage basis. On astraight arithmetic scale, the trendline will ordinarily be steeper on a stocktrading in the 50 range, for example, than on an issue selling around 15.On weekly charts employing the same price scale, the angle of Intermediate Advance will, of course, be much steeper than on the daily plotting.Different scaling will produce different angles. It is pure happenstance thatthe TEKNIPLAT sheets tend to produce the 30-degree ascending line.
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Validity of PenetrationWe have these three criteria, then, for appraising the authority or accuracyof an Intermediate Up Trendline: (1) the number of times it has been “tested”or contacted without breaking, (2) its length or duration, and (3) its angle ofascent. Given a trendline which, by the application of one or more of thesecriteria (preferably by at least two of them), appears to be a reasonablyaccurate delimiter of the trend, our next problem is to determine when ithas been finally and definitely broken.Again, we can set up three tests or criteria, two of which are practicallyidentical with the rules laid down in earlier chapters for determining decisivebreakouts from Reversal or Consolidation Formations. The first is extent ofpenetration. To be decisive, prices must not only push through the line, butclose beyond it by a margin equal to about 3% of the stock’s price. This doesnot need to be accomplished in a single day, although it often is. The 3%penetration may come as a result of 2 or 3 days of gradual decline.The second is volume of trading. We saw how activity should always beexpected to rise notably on a genuine upside breakout from an Area Pattern,but need not increase to confirm a downside break. We have seen how, inmany cases, volume does not show much increase on the first day of downbreak from Descending Triangles, for example, but usually picks up rapidlyas the decline proceeds. In our present discussion, we are dealing with UpTrendlines, and their penetration is, therefore, analogous to a downsidebreakout. We should expect the same rules to apply, and in general, they do.Given a close beyond the line by a price margin of 3%, it is not necessaryfor volume to have expanded much at that point to confirm the validity ofthe penetration.The fact is, however, that the breaking of an Intermediate Up Trendline,much more often than not, is attended by some visible intensification oftrading activity. To that extent, then, an increase in volume may be regardedas confirmation of a decisive penetration. It is a particularly useful adjunctin borderline cases. If, for example, prices start to decline from a pointsomewhat above the trendline, move down through it on conspicuouslyexpanding turnover, and close beyond it, say, only 2% of the price but at ornear the bottom of the day’s range, our 3% margin rule has not been satisfied,but the lesser margin plus the volume action may be construed as decisive.Beware, however, and do not be stampeded into a hasty commitmentby the shakeout move which cracks down through a trendline with a greatflurry of activity — perhaps several minutes of late tape — and then turnsup again to close the day back above the trend or at least very close to it.This may very well be — in fact, usually is — a false move so far as thatparticular moment is concerned. But watch the next few days’ performancevery closely; the technical situation is evidently critical, else a shakeout couldnot have been easily staged.
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PHILLIPS PETROLEUM P
1935–1938
242220191817
Sales100’s1000800600400200
J
A S O N D J F M A M J J A S O N D J19351936
F M A M J J A S O N D J1937
F M A M1938
FIGURE 151. Valid trendline penetration and its normal consequences — Reactionor Consolidation — is illustrated on nearly every chart in this chapter and on manyothers throughout the book. The above weekly chart of Phillips Petroleum, however,is reproduced here to show an outstanding exception. The Intermediate Up Trendlineprojected from “P’s” September 1936 low up across its early October and late November Bottoms was penetrated downside decisively the third week of May 1937.Moreover, a Multiple Head-and-Shoulders Top Reversal Pattern had been formingsince February, with a critical neckline at 52. And the then current Bull Market hadalready run for 4 years; “P” had come all the way up from 2! Cover up the chartfrom July 1, 1937 on, and you will agree that there was plenty of reason for anytechnician to sell at once without waiting for the 52 neckline to be broken. But this,as we have said, was one of the exceptions which occur to all technical patterns andrules. “P” turned right around and shot up to 64 before it was finished. Nevertheless,developments such as this carry a valuable warning. They very seldom appear unlessthe Major Trend has almost run out; any further rise is dangerous to follow.
The third test is also one that applies particularly to breaks which areborderline so far as margin of penetration is concerned. Suppose a stockwhich is quoted in the neighborhood of 40 declines through a well-established Intermediate Up Trendline and closes 1 or 1⅛ points below it — amargin which is only slightly less than our specified 3% — without much,if any, enlargement in trading volume. Suppose it fluctuates there for a dayor two in a dull and narrow market, and then starts to rally. If there is nopickup in activity on this recovery move — if prices simply edge up feebly
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to the underside of the trendline and tend to “round over” there withoutbeing able to close clearly above it — then the situation is indeed critical,and the slightest sign of renewed selling pressure may be taken as a signalthat the uptrend has been decisively broken.Such a return move as we have described in the preceding paragraph isknown as a Throwback or Pullback. We have previously described analogousdevelopments which follow breakouts from Head-and-Shoulders and otherpatterns, and will have more to say about them in connection with trendlineslater on.The three tests we have been discussing, which help to establish thevalidity of a trendline penetration, cannot, unfortunately, be applied inflexibly and without a modicum of judgment. The majority of IntermediateTrendlines can hardly be said to possess the precision of pattern boundarylines, and even in the latter, some leeway must be allowed. There are exceptions, as we have taken occasion to remark several times before, to everytechnical rule of price action. But judgment in the establishing of significanttrendlines and in interpreting their penetrations does come with experience.
Amendment of TrendlinesWhen a trendline is broken by a margin less than decisive, and prices subsequently rally back up through it again, doubt naturally arises as to thecontinued authority of the original line. Should it be discarded, revised, orallowed to stand as is?Here again, judgment and experience must be called into play, but a fewgeneral principles are helpful in deciding. If the original trendlines dependedon only two points, i.e., on the first two Bottoms across which it was projected, and the indecisive penetration occurred when prices returned to itfor the third time, the line had better be redrawn across the original first andthe new third Bottoms. (Of course, you will not do this until prices havemoved up from the third Bottom point and it has become clearly establishedas a Minor Bottom.) Or, you may find in such cases that a new line drawnacross the second and third Bottoms works better; if the first Bottom was aReversal Day with its closing level well above the low of its range, you mayfind that this new line, when extended back, strikes just about at that closinglevel.If, on the other hand, the original trendline has been “tested” one ormore times after it was drawn — if, that is, a third and perhaps a fourthBottom have formed on it without penetrating it and have thus “confirmed”it — then the subsequent indecisive penetration may be disregarded and theoriginal line considered to be still in effect.An intraday break through an established trendline that, however, doesnot result in prices closing beyond the line may be disregarded and the lineleft as is. In fact, as has already been suggested, the closing prices frequentlymake a better trendline than the extreme intraday lows of successive
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PARAMOUNT PICTURES
PX
6460565248
1945–1946
40Sales100’s125100755025
XD .50C
44
OCTOBER NOVEMBERDECEMBER JANUARY FEBRUARYMARCH6 13 20 27 3 10 17 24 1 8 15 22 29 5 12 19 26 2 9 16 23 2 9 16 23 30
FIGURE 152. Double Trendlines (see next page) usually are not evident until aftera trend has run for several months. In Paramount’s accelerated phase of IntermediateUptrend which began in October 1945, the double nature of the basic trendline wasnot detectable until January 1946. The inner (upper) line was broken again in April,but the outer (lower) line was not decisively penetrated downside until May, at theBull Market Top.
Bottoms, and this is most apt to be true with “thin” stocks subject to erraticswings. A bit of experimenting with different lines often pays. A thin, transparent ruler is especially useful for trendline study.There is another type of price action that may require redrawing atrendline. Sometimes, after a line has been projected up across the first twoMinor Bottoms in an advancing trend, a third Minor Bottom will form, noton that line, but well above it. In such cases, let the original line stand, butdraw in a new one across the second and third Bottom points, and watchdevelopments. If the rally from the third Bottom peters out quickly, and thenew trendline, as a consequence, is soon broken, then the original trendlineis probably the correct one. But, if the third Bottom turns out to be a “strong”one, and the new line stands up well for several weeks (and if it was not,patently, too steep to begin with), then the old line may be abandoned andthe new one regarded as the better trend definer.
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Technical Analysis of Stock Trends
1945
888076Sales100’s125100755025
BETHLEHEM STEEL
BS
JULYAUGUSTSEPTEMBER OCTOBER NOVEMBER DECEMBER7 14 21 28 4 11 18 25 1 8 15 22 29 6 13 20 27 3 10 17 24 1 8 15 22 29
FIGURE 153. Trend Channels in Bethlehem Steel in 1945. Prices burst out of the92–98 Horizontal Channel (Rectangle) on the upside in January 1946, and went onto 114. A short-term trader might have sold around 94–96 in early November (becauseof the uptrend break) and rebought at 99 in January on the Rectangle breakout. Seediscussion of Channels.
Double Trendlines and Trend RangesIn the course of your “cutting and trying” in an effort to fit a good line toan Intermediate Uptrend, you may find that two parallel lines, perhaps a pointor so apart in a stock selling in the thirties, will define the true trend patternmuch better than any single line that can be drawn. Sharp Bottoms andshakeout thrusts in such cases will often fall along the outer or lower line,while the duller, more rounded reactions will stop at or near the upper orinner line. Or the two lines will mark off a range somewhere within whichsuccessive Minor Down Waves tend to halt and reverse.Such Double Trendlines are really plentiful, although the majority ofchart technicians seem to be quite unaware of them. It pays to develop aneye for them — to watch constantly for trends to which they can be applied.They will clear up many situations in which attempts to find a single criticalline lead only to frustration and in finally giving up in disgust.Trends that you find are best defined by Double Trendlines (or by a veryBroad Trendline, if you prefer) cannot be regarded as ended until the outer,lower line has been decisively penetrated. In that connection, note what wesaid at the beginning of this topic: sharp, shakeout Bottoms tend to fall onthe outer line. The recoveries from such Bottoms are usually just as sharp,and prices, therefore, rally back above the upper, inner line quickly. Warningof an impending break in the trend is given when prices come down to theouter line steadily, rather than by the quick “shake” type of reaction, and
PN
MARCHAUGUSTSEPTEMBERDECEMBER JANUARY FEBRUARYAPRILMAYJUNE