December 1st, 2011

Avoid the Siren Calls of Sloping Trendlines of Hope

It’s time for a little “chartology”, a primer in chart reading.  Of course these opinions are personal but they are based on many years of hands on experience making successful use of and, sometimes, being disappointed by charts.

At the beginning of November, in a piece entitled “Sloping or Horizontal Trendline: Which Is More Reliable“, I wrote:

“if I have to chose between an ascending (or descending) trendline and a horizontal one to drive my decisions I would look to the horizontal one. I can’t easily calculate where the trendline will be a month or two out. But I can easily see whether there are any horizontal trendlines that mark where buyers and sellers have traded places for control of a stock’s trend. Those are the transfers of power that I rely on to help me anticipate what might be ahead for a stock (or Index).”

Another perfect example presented itself today when a fellow blogger Springheel Jack wrote a piece on the Slope of Hope about the prospects of a break out in the much maligned and downtrodden financial sector (primarily, banks).  According to a chart presented by Jack, there is a descending trendline from the pre-Financial Crisis top in May 2007 to the failed attempt to move higher this past spring.  In addition to descending trendline, chart also shows Price/Volume bars with struggle for power between the 14-16. Resolution of that struggle will signal either beginning of trend reversal or consolidation for further move down.  The chart with his annotations was:

Descending trendline

From Springheel Jack at Slop of Hope

My chart of XLF and its resistance trendlines looks like this:

Note:

  1. Any number of sloping trendlines could have been draw over the past two years which failed to generate a trend reversal.
  2. There are several horizontal trendlines at key price levels that have over the past several years acted as pivot points the barred further recovery in XLF.  Currently, that level is 13.50 followed by another hurdle at 15.50 and, finally, a breakthrough that would mark a true momentum trend reversal at 16.60.
  3. Rarely are ascending supporting trendlines mentioned but there is one stretching from the March 2009 bottom to the low last Friday.  That ascending trendline carries about as much significance as Springheel Jack’s descending one but, if you need an exit point that marks failure it would be the stock violating that ascending trendline.

Bottom line, don’t be swayed by the siren calls of commentators singing the song of descending sloping trendlines.  Look for the horizontal walls of resistance which if scaled truly marks an escape from a trading range trap.

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