The Analysis is Done Horizontally, Not Diagonally

[PristineTrading 10]

This week I want to share with you one of the most enlightening moments in my learning process related to the use of trendlines. When I decided to educate myself about technical analysis and the markets there were no online trading seminars. There were no seminars at all, but if there were they wouldn't have been online since there was no internet. However, there were market letters that that came by snail-mail that did some education along with trade recommendations. All used trendlines in the analysis.

 

Let's review what is taught about the use of trend lines and questions I had after using them.

 

Trend line Analysis:

 

• A trend line needs at least two connecting points.
  

 

• A trend line with three or more points is stronger
  

 

• The trend line connecting points shouldn't be too close
  

 

• The trend line shouldn't be too steep or shallow
  

 

• An uptrend line will act as support
  

 

• A downtrend line will act as resistance
  

 

• A trend line once broken will have the opposite effect
  

 

• The break of a long existing trend line changes the trend
  

 

 

 

Questioning the validity for trendlines:

 

• Should trendlines be drawn from bar extremes or the closes?
  

 

• Are trendlines drawn in a higher time frame stronger?
  

 

• Are intersecting trendlines a stronger reference point?
  

 

• Are trendlines valid in all time frames, even a 1-min.?
  

 

• Is a trend line drawn on an Arithmetic scaled chart more valid than those on a Semi-log scaled chart?
  

 

• Is the break of a trend line really a change in the trend?
  

 

• How many times can a trend line be redrawn?
  

 

• Can extending a line really predict where prices will reverse?
  

 

My conclusion about the use of trendlines is that while widely used and have the potential to effect price movement on market indices especially, they are subjective as reference points of support and resistance at best and not needed. If you have used trendlines, had one break, seen prices reverse back in the original direction and you then redrew the line like I have. The question that came to my mind was, is it possible to "connect the dots" again and locate support and resistance? It didn't make sense, not common sense. The answer was no.

 

The enlightening moment came when I realize that the analysis of support and resistance is not to be done diagonally, it has to be done horizontally. It was so simple, but all the hocus-pocus analysis taught made it so hard to get to that point. Besides the basic Trend Line there are Gann lines, Gann Box lines, Regression Channel lines. Median Lines, Andrews Pitchfork Lines, Fibonacci Circle lines, Fibonacci Fan Lines and it goes on and on. It should be no surprise why so many are confused about the use of technical analysis. Been there or there right now? Here what to do, simply look to the left and stop drawing lines!

 

Let's review the trend lines and the real coming overhead resistance on some of the broader market indices.

 

 

In the chart above of the S&P 500 ETF symbol SPY, I drew the downtrend line. Clearly, prices ignored it like it was not there. Actually, it is only there for those that drew it, so it only exists as a reference point for them, in their minds; it's not real. What is real is the area in red, which is there for everyone. Somewhere in that box sellers are going to overcome buyers. Will that be for a day, two days? How far will prices drop? That's the unknown. Right now there is no pattern to suggest that. The only thing known is that the area to the left is resistance and the move up has the greatest odds of stalling in the box.

 

 

In the chart above the Nasdaq 100 ETF QQQ, I drew the downtrend line and we see that prices did stall at the line before moving higher. Was the line the reason? No it was not, it was the small area of price resistance to the left. Resistance does not mean prices have to go lower. Especially, when prices have fallen for a while as these did into an area of Major Support (MS) (not shown) where buyers will show up.

 

The Qs entered into the area of price resistance Friday and sellers are going to show up in there. The 200-MA is also in the box and while subjective as a reference point of resistance, it is a widely followed point of reference. Notice the number of overlapping candles that are directly to the left of it and the unfilled gap.

 

 

n the chart above of the Russell 2000 ETF symbol IWM, I drew the downtrend line. Odds are prices are going to stall there and trend line users will point to that. Why will prices stall there? Because price resistance is to the left and the other markets are coming into resistance also. It just happens to work out this way once and a while.

 

Technical analysis does not have to be complicated; however, we have a tendency to follow what is when it comes to the markets. I did years ago, but eventually realized the majority of what is taught is nonsense. I don't know how all this nonsense started, but it's been going on a long time and continues. Most do not side-step this black hole on the way to finding the truth, if they ever do. You don't have to or can get out of it now.

 

Greg Capra

President & CEO

Pristine Capital Holdings, Inc.

[DbPhoenix 42]

I hope that eventually you will abandon MAs as well. They are no more useful than trendlines and are just as likely -- if not more so -- to trip up the unwary trader.

 

Db

[MCM 10]

Technical analysis does not have to be complicated; however, we have a tendency to follow what is when it comes to the markets. I did years ago, but eventually realized the majority of what is taught is nonsense. I don't know how all this nonsense started, but it's been going on a long time and continues. Most do not side-step this black hole on the way to finding the truth, if they ever do. You don't have to or can get out of it now.

 

Greg Capra

President & CEO

Pristine Capital Holdings, Inc.

 

As an educator - I would hope you have the enlightened viewpoint that some of the "nonsense" that you do not understand/comprehend/have an ability to use in your trading - actually comes from rather fascinating roots. As an example - the median line was born from Dr. Alan Andrews - who borrowed knowledge from Roger Babson - who took great lessons from Sir Isaac Newton. Three men - no nonsense in any of them. (OK Babson was a prohibitionist - I would tell him that was nonsense over a beer.) Two of the three went on to make a tremendous amount of money trading - using tilted lines!

 

Just because one doesn't understand a method or how to PROPERLY use a method - does not mean that it has no value. Teach your students your method. Show them how it works wonderfully for you. Then set them free to learn on their own. Encourage them to seek knowledge in all places. Perhaps they use it - maybe they don't. But don't disregard some of the wildly successful methodology of other traders because it doesnt suit your personality.

 

PS - next time you have a hard time believing a tilted line - tilt your head. It will be straight.

 

Cheers