JULY24 1 8 15 22 29 5 12 19 26 2 9 16 23 2 9 16 23 30 6 13 20 27 4 11 18 25 1 8 15 22 29 6 13 20 27 3 10 17 24 31 7 14 21 28 5
1945–1946
PAN AMERICAN AIRWAYS
FIGURE 154. A 10-month downtrend, extraordinarily long and straight, which was nicely defined by Double BasicTrendlines above the Price Channel, and also by a double set of Return Lines below it. The Major Top started witha strong One-Day Reversal on December 3, 1945, and worked out into a Descending Triangle which broke February19, 1946. The Symmetrical Triangle beginning to appear in September 1946 also broke out downside.
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then have difficulty rallying back through the inner line. Watch such developments closely. A break down may not follow; the situation may still be“saved,” but the chances are that the trend is near its end.
Trend ChannelsAt the start of this trend study, we applied the term Basic Trendline to theline which slopes up across the Wave Bottoms in an advance, and to the linewhich slopes down across the Wave Tops in a decline. And we noted thatthe opposite Reversal Points, i.e., the wave crests in an advance and the wavetroughs in a decline, were, as a rule, less clearly delimited. That is one of thereasons why all of our discussion up to this point has been devoted to BasicTrendlines. Another reason is, of course, that the technician’s most urgenttask is to determine when a trend has run out, and for that purpose, theBasic Line is all important.In a fair share of normal trends, however, the Minor Waves are sufficiently regular to be defined at their other extremes by another line. That is,the Tops of the rallies composing an Intermediate Advance sometimesdevelop along a line which is approximately parallel to the Basic Trendlineprojected along their Bottoms. This parallel might be called the Return Line,since it marks the zone where reactions (return moves against the prevailingtrend) originate. The area between Basic Trendline and Return Line is theTrend Channel.Nicely defined Trend Channels appear most often in actively tradedstocks of large outstanding issue — least often in the less popular and therelatively thin equities which receive only sporadic attention from investors.The value of the Trend Channel concept for the technical trader would hardlyseem to require extended comment here; its tactical utilization is discussedin the second half of this book.Its greatest utility, however, is not what usually appeals to the beginnerwhen he first makes its acquaintance, viz., the determination of good profittaking levels. Experienced technicians find it more helpful in a negativesense. Thus, once a Trend Channel appears to have become well established,any failure of a rally to reach the Return Line (top parallel of the channel inan Intermediate Advance) is taken as a sign of deterioration in the trend.Further, the margin by which a rally fails to reach the Return Line (beforeturning down) frequently equals the margin by which the Basic Trendlineis penetrated by the ensuing decline before a halt or Throwback in the latteroccurs.By the same token, given an established Trend Channel, when a reactionfrom the Return Line fails to carry prices all the way back to the BasicTrendline but bottoms out somewhere above it, the advance from that Bottom will usually push up out of the channel on the top side (through theReturn Line) by a margin approximately equal to the margin by which thereaction failed to reach the bottom of the channel (Basic Trendline).
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1945
52
IDT
RL
48
RL
44
IU T40Sales100’s25020015010050
SOUTHERN PACIFIC
SX
AUGUST SEPTEMBERAPRILMAYJUNEJULY7 14 21 28 5 12 19 26 2 9 16 23 30 7 14 21 28 4 11 18 25 1 8 15 22 29
FIGURE 155. Well-marked Intermediate Basic Trendline and Return Lines in Southern Pacific, 1945. Note Flags within Trend Channels — an up Flag in June and adown Flag in August. The Uptrend Channel, which began August 22, ran untilFebruary 1946.
34194532302826Sales100’s125100755025
HUDSON MOTORS
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SEPTEMBER OCTOBER NOVEMBER DECEMBERJULYAUGUST7 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 156. Note that the extent by which prices failed to come down to theirReturn Line in late November measured the distance by which they advancedthrough and above the Basic Down Trendline in early December. This rule is statedon the preceding page.
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Experimental LinesYour experienced technician, in fact, is constantly drawing trendlines of allsorts — Minor, Intermediate, and Major — on his charts. He will put themin at first very lightly penciled wherever he can find an excuse to draw one.Many will quickly prove to be of no significance, and those he may erase.Others will “stand up” — will show evidence of technical authority — andthose he will make heavier, or color as suggested later on. He will be constantly on the watch for Double Trendlines and will draw tentative ReturnLines to mark off possible channels at every opportunity. As soon as he haswhat appears to be a Basic Up Trendline projected from two Bottoms, forexample, he will go back to the Top of the rally between those two Bottomsand draw from that parallel to the Bottom Trendline. If the next rally comesup to that parallel, stops there and turns down, he has a probable ReturnLine and channel established.This practice of drawing in and experimenting with every trendline,which the price action permits or suggests, is earnestly recommended to thereader of this book, particularly if the technical approach is new to him. Itis the quickest way — in fact, the only way — of acquiring the experiencewe have stressed as essential to recognition, judgment, and utilization oftrendline implications in trading.Perhaps we should add here one “don’t” for the beginner. You will havenoted that nowhere have we mentioned a line projected from a Bottom to aTop, or vice versa. Trendlines are always drawn across two or more Bottoms,or two or more Tops. They should never be drawn to cross through the pricetrack. (Prices may cross their extensions later, but this should not havehappened at the time the lines are first drawn.) If you did not know better,you might, for example, put in a line from the Top of the left shoulder tothe Top of the right shoulder of a Head-and-Shoulders Formation, thuscutting through the head, but such a line would have no technical validity.
Consequences of Trendline Penetration — ThrowbacksAt the beginning of this chapter, we mentioned the probable consequencesof a break down through an Intermediate Up Trendline. To repeat, if anIntermediate Up Trendline has been constructed, has qualified as technicallysignificant by the tests previously discussed, and has then been decisivelybroken, the inference is that uptrend is finished. And the consequences tobe expected are either a full Intermediate Recession or a period of Consolidation (usually becoming a recognizable Area Formation). Technical indications of other sorts may be seen on the chart, which will suggest to youwhich of these two consequences is the more likely. In either event, theIntermediate Trend trader will certainly look twice before attempting to findfurther profit in that particular situation at that time.
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271
F
24222019
1945
18Sales100’s25020015010050JANUARY FEBRUARYMARCHAPRILMAYJUNE6 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 157. Six months of an Uptrend Channel which actually started to form inDecember 1943! It was broken downside in August 1945.
A more immediate but less important probable consequence of trendlinepenetration has also been mentioned — the “Pullback.” This deserves furtherdiscussion. Pullbacks that follow breakouts from Reversal and ConsolidationFormations have been described in our earlier studies of those price patterns.It is easy to understand why a rally which develops after prices break outthrough the lower boundary of a Rectangle, for example, will be stoppedwhen it gets back to that boundary by the Resistance (supply) now residingthere. Support–Resistance Theory enables us to rationalize most of theThrowback moves which occur after prices have broken out of other typesof Reversal or Consolidation Areas. The Pullbacks which follow trendlinepenetrations cannot be thus rationalized; yet they occur much more frequently, and they appear to be stopped much more exactly at the oldtrendline level than is the case with Area Formations. Why should prices,after they have thrust down through a rising trendline, perhaps for severalpoints, turn back up and ascend to or very near the old trendline, stop thereand then go off in renewed decline? The Top of that Pullback Rally may be2 or 3 points above the original penetration level, since the trendline issloping up all the time; nevertheless, there it stops, falters, gives up. No oneknows why supply should overcome demand, why Resistance should be soplainly evident at that particular point whose level is determined by twovariants, the slope of the line and the time it is reached.Of course, you cannot reasonably expect a Pullback Rally to climb allthe way back to a trendline that is ascending at a very steep angle, whichmay mean the attainment of a new high price for the entire Intermediate
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IDT
242220
MUT
RL
191817NASH – KELVINATOR
NK
1946
16Sales100’s125100755025MAYJUNEJULYAPRILAUGUSTSEPTEMBER6 13 20 27 4 11 18 25 1 8 15 22 29 6 13 20 27 3 10 17 24 31 7 14 21 28
FIGURE 158. The downtrend which started in June 1946 in Nash–Kelvinator, signaled by the break of both its Intermediate and Major Up Trendlines (MUT) onJuly 15, made a nice channel until September. An Intermediate Down Trendline,drawn across the June 17 and July 1 highs, held for the August rally. The ReturnLine, drawn parallel to it across the June 20 low, held in late July but remained intactfor only a few days at the end of August. The August rally in both price and volumepattern showed Bear Market characteristics. Compare this chart with Figure 68 andyou will see that a Major Double Top was signaled on July 23.
Uptrend; yet even that happens in more than just a few cases. What can becounted on in the great majority of typical Up Trendlines (those which slantup at a normal or fairly flat angle) is that after the line has been broken, aPullback Rally will develop, either in a few days or in the usual Minor Wavetempo, and will carry prices back up to the projected trendline.Throwbacks do not occur, it should be noted, when prices erupt througha Return Line, i.e., break out of the top side of an Uptrend Channel. Or, morecorrectly stated, the Return Line does not function as a Support against aThrowback after prices have gone through it. An unusually strong upswingin a Rising Trend Channel may carry beyond the top of the channel as definedby its Return Line, but the next reaction may go right back down throughit without evidencing any hesitation at its level.The Throwback is one of the mysteries in trendline price action to whichwe alluded at the outset. The technical analyst who studies trends andtrendlines over any considerable period will discover many other even moremysterious phenomena which cannot find space in this treatise, because noway has yet been found to put them to practical use in trading and investing.
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H
6460
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IUT
48
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MZ
1946
44Sales100’s5040302010JUNEJULYAUGUSTMAYAPRIL23 30 6 13 20 27 4 11 18 25 1 8 15 22 29 6 13 20 27 3 10 17 24 31 7 14
FIGURE 159. The decline that took Macy down through an Intermediate UpTrendline (IUT) in June 1946 turned out to be also the drop from the head of a “FlatShouldered” Head-and-Shoulders Top, which was, in turn, part of a larger Complex.The upper neckline was broken June 19 and the lower on July 16. Note Pullbacks toeach. F1, F2, and F3 are tentative Fan Lines. Prices were finally able to clear F3 inDecember, but by that time a Primary Bear Market had been signaled; so, the FanRule no longer applied. Fans call the turn only on Secondary (Corrective) Moves.
They are extraordinarily interesting in retrospect, but are not subject toforecast.
Intermediate DowntrendsIn all of the foregoing discussion of trends and trendlines we have concentrated on uptrends; we have, in fact, had in mind specifically IntermediateAdvances in the direction of the Primary Trend, i.e., within a Major BullMarket. Those particular trends are most apt to develop “normally,” are mostamenable to trendline definition. Intermediate Down Moves in a Major BearMarket may well be taken up next. Before we discuss the respects in whichthey differ from Primary Advances, we should recall that the Basic Trendlineon a down-move is the line projected across the Tops of the rallies within it.The Trend Channel will be to the left of that trendline and below it on thechart. The Return Line (if any) will define the Bottom of the channel.Intermediate (Bear Market) Downtrends are far less regular and uniformin their development than Bull Market Advances. Their angles of decline arecharacteristically steeper, and this is particularly true, of course, of the PanicMoves which are typical of the second phase of a Bear Market, as we saw
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ARKANSAS BEST
3634
30
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2422
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F3
S
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S
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H
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ARKANSAS BEST
ABZ
1987
F1
11Sales100’s1000800600400200JANUARY FEBRUARY MARCHAPRILMAYJUNEJULYAUGUST7 24 31 7 14 21 28 7 14 21 28 4 11 18 25 2 9 16 23 30 6 13 20 27 4 11 18 25 1 8 15XD.09
XD.09
FIGURE 160. “ABZ” dropped sharply following its late January high, capped offa nearly uninterrupted 2-year rally. But despite the rapidity and severity of thePullback, it was, in fact, a picture-perfect reaction, which stopped just above excellentlong-term Support at the 1983 high after retracing almost exactly 50% from its Januarypeak. Not only is the reaction a classic, but so, too, is the Fan Line developmentwhich, when coupled with the recently completed Head-and-Shoulders Bottom,suggests “ABZ” has reversed its short-term downtrend.
in our discussion of Major Trends in Chapter 3. Moreover, prices have atendency to drop away from any trendline which is drawn across the firsttwo Rally Tops; in other words, to curve down or accelerate as the moveproceeds. This shows plainly on an arithmetically scaled chart and, evenmore conspicuously on a semilogarithmic sheet.
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The practical results of this down-curving tendency are not so important,insofar as it delays the penetration of the original trendline and, hence, thegiving of a signal of trend change. The fact is that prices tend to thrasharound for some time, making a base at the Bottom of one of these precipitousdeclines. In so doing, they work out sideways on the chart, and the trendfrequently does not turn up visibly until after the trendline has finally beenreached and broken through on the upside after all. Thus, there is justificationfor drawing down trendlines and keeping them in view even though theymay seem, for some time, simply to travel off into space with no apparentrelevance to the actual trend of prices.It naturally follows from the above that Return Lines on most BearMarket Declines have little practical utility; they are, more often than not,very quickly broken downside. Good channels are hard to find.However, and this is of considerable practical importance, the very lastIntermediate Downswing in a Major Bear Market, i.e., the last Primary Movewhich leads to the final, long-term Bottom, is usually cleaner, more regular,less precipitous — in other words, a more nearly normal trend of the sortwe expect to find in most Intermediate Advances in a Bull Market (except,of course, that it slants down instead of up). This interesting habit is, as wesaid, of practical importance. Knowing it, we have an additional and veryuseful clue to the end of a Bear Market.When, after a Major Bear Trend has proceeded for some time and distance, and has experienced at least one Panic Sell-Off, it then goes off inanother but less active and more orderly decline, and this decline developsand follows a good trendline. Watch it closely. If this Intermediate holds toits steady and not-too-steep downward course — if its trendline is contactedseveral times by Minor Rallies — if it produces a fairly consistent channel,and prices do not “fall out of bed” down through its parallel Return Line,then the eventual upside penetration of this trendline may well signal aMajor Turn, the inception of a new Bull Market.
Corrective Trends — The Fan PrincipleIn this study of Intermediate Trendlines, we have left to be taken up last thesubject of Secondary or Corrective Trends. These are the Intermediate Declineswhich interrupt the Primary Advances in a Bull Market, and the IntermediateRecoveries which alternate with Primary Declines in Bear Markets.Intermediate Reactions against the Major Direction of the market take avariety of forms. Sometimes, as we have seen in our earlier study of chartpatterns, they run out into Consolidation Formations — Triangles, Rectangles, etc. — in which the net price reaction is of minor consequence, but timeis consumed in backing and filling before the Primary Trend can be resumed.In such cases, of course, there is no basis for drawing an IntermediateTrendline, nor is one needed for any practical purpose.At the other extreme, so to speak, we find Corrective Swings whichdevelop as a more or less orderly straight-line return of moderate slope to
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5652
BARBER ASPHALT
48
AS
1946
40F3
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F2
XD .25C
F1
XD .25C
44
JANUARY FEBRUARY5 12 19 26 2 9 16 23 2
APRILJUNEMAYMARCH9 16 23 30 6 13 20 27 4 11 18 25 1 8 15 22 29
FIGURE 161. A valid application of the Three-Fan Principle. Note that prices, afterthey pushed up through F1 in March, fell back to it but did not repenetrate it. WhenF2 was broken in late March, prices came back to it at the end of April but did notgo below it. F3 was surmounted in May. This was a Bull Market Reaction; “AS” madeits final Top above 64 in August. The March–May pattern might be called a weakDouble Bottom.
the nearest good Intermediate Support or Resistance Level, retracing perhapsa third to a half of the preceding Primary Swing. These reactions producegood trendlines, as a rule, and the eventual penetration of their trendlinesis a good technical signal of Reversal. Intermediate Corrections clearly ofthis type, it may be added, are relatively rare.A third form taken by Intermediate Corrections is nearly as common asthe first named above (Consolidation Pattern) and much more common onthe charts than the second. In a Bull Market, it starts with a sharp reactionwhich proceeds for several days — perhaps for as much as 2 weeks —producing a steep Minor Trendline. This line is broken upside by a quickMinor Rally, after which prices slide off again in a duller and less precipitatetrend. A second Minor Trendline may now be drawn from the original highpoint across the Top of the upthrust that broke the first trend. This secondtrendline is broken by another partial recovery thrust, and a third and stillduller and flatter sell-off ensues. A third trendline can now be drawn fromthe original high across the Top of the second upthrust. The whole move,by this time, has taken roughly and irregularly a “Saucering-out” form. Thethree trendlines drawn from the original Reversal points from which the
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DELAWARE & HUDSON
277
DH
36343230Sales100’s125100755025
1944
JULYAUGUST SEPTEMBER OCTOBER NOVEMBERDECEMBER8 15 22 29 5 12 19 26 2 9 16 23 30 7 14 21 28 4 11 18 25 2 9 16 23 30
FIGURE 162. Try the Three-Fan Principle on this chart of the late 1944 Bull MarketReaction out of a Symmetrical Triangle in “DH.” F1 should be drawn from theAugust 30 high down across the September 12 closing. F2 is already marked on thechart but not labeled. F3 would extend from August 30 across the Rally Top ofNovember 9. It was surmounted on increased volume November 21. The mid-September to November price pattern looked at first like a Descending Triangle butvolume began to rise in October.
Corrective Decline started, each at a flatter angle than its predecessor, areknown as Fan Lines. And the rule is that when the third Fan Line is brokenupside, the low of the Intermediate Correction has been seen.There are exceptions to this rule — as there are to every so-called ruleof technical chart analysis. Rarely, a correction of this type will go on to makeanother dip to a new low for the whole corrective move before prices reallystart to round up again. But the Three-Fan Principle works in the greatmajority of cases. Moreover, it offers the trader an opportunity to take aposition at a point where he can logically employ a very near stop orderand, thus, limit his loss to a controlled amount if the rule does not work out.It is interesting to note that prices consistently Throwback in these movements to the preceding Fan Line after each upthrust. The new Primary Swing,once the low has been passed, usually starts slowly and carries out for atime the Saucer picture.The Three-Fan Rule works just as well in calling the turn on IntermediateRecoveries in a Bear Market, the majority of which take the rounding formwhich is adapted to its use.Note, however, that the Fan Principle is normally applied only to corrective moves, i.e., to determine the end of Intermediate Reactions in a BullMarket and of Intermediate Recoveries in a Bear Market.
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MARCH APRILMAYJUNEAUGUSTJULYSEPTEMBEROCTOBER NOVEMBER17 24 31 7 14 21 28 5 12 19 26 2 9 16 23 30 7 14 21 28 4 11 18 25 1 8 15 22 29 6 13 20 27 3 10 17 24 1XD. 11XD. 11
F1
F2
DECEMBER8 15 22 29
F3
278
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12
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20191817
22
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30
BUCYRUS ERIE CO.
BY
1984
10479
FIGURE 163. In a downtrend throughout the first half, “BY” gave back a large partof its 1983 rally by mid-summer. But the 1982 low held the Bears in check and overthe following several months, this issue etched out an excellent Fan Pattern. Fan Line1 gave way in mid-September on a high-volume penetration. The advance quicklylost its momentum, but old Resistance/new Support contained the Pullback perfectly,setting the stage for a rally through Fan Line 2. This occurred in mid-November ongood volume. Following a 5-week correction, “BY” charged through Fan Line 3 onthe best volume of the 3 breakouts.
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We shall take up Major Trendlines in the following chapter, but, beforewe leave this study of Intermediate Trends, it will be well to state again thatthe practical application of trendlines in actual trading requires experience,and the good judgment to be attained only therefrom. Some technical analysts depend largely on trendline studies; a few attempt to use trendlinesalmost exclusively; but the majority have found that they are best employedas an adjunct to other technical data.Technical analysis of a stock chart is something like putting together ajigsaw puzzle. There are many items to be considered, among them volume,pattern, and the measurements derived therefrom, Support and ResistanceLevels, trendlines, general market prospects — and all fitted into place toget the complete picture.
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chapter fifteen
Major TrendlinesIn the preceding chapter on Intermediate Trendlines, mention was made ofthe distinctive effects produced by arithmetic and semilogarithmic plotting,but it was noted that these differences were unimportant in connection withMinor Trends or Intermediate Trends of average duration. When we cometo Major Trends, however, we find the difference does become important.If you will examine a large collection of arithmetically scaled monthlycharts covering 10 years or more of market history, you will quickly see thatBull Trends, in the great majority of actively traded, more or less speculativecommon stocks, tend to accelerate. They start slowly and push up at a steeperand steeper angle as they approach a Major Top. This up-curving path takesthem farther and farther away from any straight trendline drawn from twoBottom points in the first, slow-moving stage of advance. As a consequence,they top out and have gone down a long way in a recession which may beof Major consequence before their straight trendline is again touched.Many of the stocks that show such typical accelerating curves in theiradvance (Major) Trends on arithmetic paper produce straight trends on alogarithmic scale. As a consequence, their logarithmic Major Trendlines arebroken more quickly, and usually at a higher price level, when at last theirtrends do top out and turn down. In the case of such stocks, then, thelogarithmic scale gives a better trend signal.But there are other stocks — mostly of the more substantial investmentor semi-investment type — which tend to advance in straight arithmetictrends. Consolidated Edison, General Motors, and Libbey–Owens–