level of the apex, which, in brief, represents the
concentration level or axis of the Triangle’s Support and Resistance.
The intersection of the two converging boundary lines of a Symmetrical Triangle has
sometimes been called a “cradle.” The axis Support (or Resistance) is strongest near the
cradle point and gets weaker as the axis line (apex level) is extended out to the right on the
chart (i.e., as time passes). Thus, if a late breakout move fails to carry prices very far from
the Triangle area, and the trend then peters out, flattens, and begins to react after the cradle
point has been passed in terms of time, its action, as it reaches the axis line, must be closely
watched. (A stop-loss order may be indicated here.) Should the axis Support fail to hold,
the reaction may plunge through and accelerate in a more extensive swing, which has aptly
been termed an “end run around the line.”
Volume on breaks through Support
On those occasions when prices fail to retreat when they hit a Resistance (or Support) Range,
but perhaps after holding there for several days, push on through, there is nearly always a
sudden acceleration and a marked pickup in volume. This may be taken as confirmatory
evidence of a decisive break and, consequently, an indication the move will carry on. The
reasons for this volume increase are obscure. Some say, “It takes volume to overcome
SOUTHERN RAILWAYS R
1946
APRIL MAY JUNE JUL YA UGUSTS EPTEMBER
XD 75C
XD 75C
NL
H
SS
H SS
64
60
56
52
48
44
40
38
36
34
Sales
100’s
125
100
75
50
25
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
Figure 13.12 Here is a typical case of two Pullbacks to a Head-and-Shoulders neckline, the first
immediately after the breakout and the second three weeks later. Note the initial breakthrough
“bounced” from the early April Top Support and the late July decline met Support at the general
April–May Congestion Area. However, what this chart particularly illustrates is how volume
increases when a good Support Range is penetrated. Note the decided pickup on August 27 , when
the April–May area was left behind.
206 Technical Analysis of Stock Trends
Resistance,” which is true enough, but the volume usually comes after the Resistance has
been penetrated. Therefore, others say, “The volume is evidence that technicians see what
has happened and are now jumping in.” But that line of thought, in the authors’ opinions,
also has little to substantiate it. (We shall have more to say about the questionable influence
of technicians on the trend later on.) Many of the arguments over volume change versus
price change smack of the old hen-or-egg riddle. In any event, causes for many technical
phenomena, such as this one, may be left to the academicians, provided the practical
implications are clear.
Support and Resistance in the Averages
As has been the case with nearly every other technical phenomenon we have studied, the
principles of Support and Resistance apply, with suitable allowances, to Averages as well
as to individual stocks. Since an Average reflects the combined charts of the majority of
the issues that compose it, but with a minority of them frequently evincing quite divergent
patterns, it follows naturally that Support and Resistance Zones in the Averages cannot be
as sharply and narrowly construed. Minor Tops and Bottoms in the Averages, particularly,
are less dependable as Resistance Levels. Clearly defined and important Intermediate
Reversals, however, as they nearly always represent Reversals in the entire market
(practically all stocks), will normally produce strong Resistance (or Support, as the case
may be) in the subsequent Average Trend.
When the Averages break down through a Support Level, but simultaneously one
or more stocks hold firm at or above their corresponding individual Supports, there is a
presumption that those particular stocks are in a stronger position than others to participate
in the next recovery. The phrase “other things being equal” should be added, however, for
there are qualifications to this presumption that must be considered. For instance, it may
be that the stock that has resisted decline will, for that very reason, be less attractive to new
buyers than one that broke drastically and is now purchasable at a more “attractive” price.
Many of the claims made regarding future prospects for stocks that have, by one
criterion or another, previously evinced “better-than-Average” or “worse-than-Average”
market performance permit argument either way. It is safest to treat all such relative
performance indications as only one minor factor to be appraised in the overall chart
picture.
207
chapter fourteen
Trendlines and Channels
One of our basic tenets in this system of technical stock chart analysis—indeed, a fact
that any neophyte can quickly verify for himself by inspection of the market records for
whatever period he chooses—is that prices move in trends. The market, in general, and the
many stocks that compose it, do not jump up and down in an altogether random fashion;
on the contrary, they show definite organization and pattern in their charted course. (For
illustrations in this chapter, see Figures 14.1 through 14.17.)
Prices move in trends. These trends may be either up or down or sideways (horizontal).
They may be brief or of long duration. They may be classified as Major (Primary),
Intermediate (Secondary), or Minor, according to the rules of Dow Theory, or as Horizontal
Line Formations. (The distinction between a short Intermediate and an extended Minor
Trend is often more difficult to make with individual stocks than it is with the Averages,
but it is not so important.) Sooner or later, trends change; they may change by reversing
from up to down or down to up, or they may also change direction without reversing as
from up to sideways and then perhaps to up again, or from a moderate slope to a steep
slope, and vice versa.
Profits a


ded Minor
Trend is often more difficult to make with individual stocks than it is with the Averages,
but it is not so important.) Sooner or later, trends change; they may change by reversing
from up to down or down to up, or they may also change direction without reversing as
from up to sideways and then perhaps to up again, or from a moderate slope to a steep
slope, and vice versa.
Profits are made by capitalizing on up- or downtrends by following them until they are
reversed. The investor’s problem is to recognize a profitable trend at the earliest possible
stage of its development and then later to detect, again as quickly as possible, its end and
Reversal. The Reversal of any important trend is usually characterized, as we have already
seen, by the construction of some sort of joint price and volume pattern—in brief, of a
Reversal Formation.
The Trendline
All of the foregoing statements regarding trends have been expressed or implied in earlier
chapters of this text. It is our purpose now to examine trends, as such, more closely, to
see how they may be plotted most effectively on the charts, and to determine to what
extent they can be used to reinforce or supplement the technical forecasts derived from our
other chart formation and Support–Resistance studies—sometimes to furnish even earlier
forecasts or warnings of change.
One of the first discoveries a new student is likely to make when he begins to inspect
stock charts with a critical eye is that nearly all Minor and most Intermediate Trends
follow nearly straight lines. A few readers will, perhaps, dismiss this as perfectly natural,
something to be taken for granted. But the majority become increasingly amazed and excited
as they delve deeper. Not only the smaller fluctuations, but also the great Primary Swings
of several years’ duration frequently appear on the charts as though their courses had
been plotted with a straight-edge ruler. This phenomenon is, in truth, the most fascinating,
impressive, and mysterious all the stock charts exhibit.
If we actually apply a ruler to a number of charted price trends, we quickly discover the
line that most often is really straight in an uptrend is a line connecting the lower extremes
of the Minor Recessions within those trends. In other words, an advancing wave in the
208 Technical Analysis of Stock Trends
stock market is composed of a series of ripples and the Bottoms of each of these ripples
tend to form on, or very close to, an upward-slanting straight line. The Tops of the ripples
are usually less even; sometimes they also can be defined by a straight line, but more often,
they vary slightly in amplitude, and so any line connecting their upper tips would be more
or less crooked.
On a Descending Price Trend, the line most likely to be straight is the one that connects
the Tops of the Minor Rallies within it, while the Minor Bottoms may or may not fall along
a straight edge.
These two lines—the one that slants up along the successive wave Bottoms within a
broad up-move and the one that slants down across successive wave Tops within a broad
down-move—are the basic trendlines.
It is unfortunate that a more distinctive name for them has never been devised than the
threadbare word “line,” which has so many other uses and connotations. A few analysts
have called them “tangents,” a term that has the advantage of novelty, but, because it is a
distinct perversion of the true meaning of the word tangent , confuses many readers even
more. Perhaps tangent will eventually become established in this new sense. We shall be
satisfied herein with the overworked “line,” and will give it some distinctiveness in its
present context by joining it to trend in the one word “trendline.”
ATLANTIC REFINING AFI
1944 1945 1946 1947
52
48
44
40
38
36
34
32
30
28
26
Sales
100’s
250200
150
10050
Figure 14.1 A series of Intermediate Trendlines drawn to illustrate the “basic” principle (see
“How Trendlines Are Drawn”) on a weekly chart of Atlantic Refining, extending from January
1944 through August 1947 . Observe that each up trendline required two distinct Bottom 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 and September 1945. The Bottom points that fixed the
early 1946 up trendline, on the other hand, were months apart—February and June. Note that only
final Trendlines are shown here. Many other experimental lines might have been drawn on this chart
originally, including several uptrends whose Intermediate authority was questionable because they
were “too steep”—as in early 1944, late 1945, and early 1946. There are also some interesting examples
of Pullbacks (after trendline penetration) that are discussed later in this chapter. Note July 1944, April
1945, September 1945, and May 1947 .
209Chapter fourteen: Trendlin es and Channels
Trendlines, you may have heard it said, “are made to be broken,” but that is one of those
exasperatingly sententious remarks that fails to clarify anything. Of course they are broken;
they are all always broken, ultimately, and some very shortly after they are set up. The
problem is to decide which breaks (i.e., penetrations by a price movement) are of important
technical significance and which are of no practical consequence, requiring possibly only
a Minor Correction in the drawing of the original trendline. There are no 100% certain
quick answers to this problem; the significance of some penetrations cannot be determined
as soon as they appear, but rather must await confirmatory indications from other chart
developments. In a great majority of instances, however, an important break—one that
requires a prompt review and possibly a revision of trading policy—is easy to recognize.
How Trendlines are drawn
First, how are trendlines drawn? A straight line is mathematically determined by any
two points along it. To draw a trendli

eBooks\Technical Analysis of Stock Trends 11thed\original\Technical Analysis of Stock Trends.pdf


ey appear, but rather must await confirmatory indications from other chart
developments. In a great majority of instances, however, an important break—one that
requires a prompt review and possibly a revision of trading policy—is easy to recognize.
How Trendlines are drawn
First, how are trendlines drawn? A straight line is mathematically determined by any
two points along it. To draw a trendline, therefore, we require two determining points—
two established Top Reversal points to fix a Down Trendline and two established Bottom
Reversal points to fix an Up Trendline. The principle here is the same as the one we laid
down in our specifications for drawing Triangle boundary lines in Chapter 8. The fact is that
boundary lines of Triangles and Rectangles, as well as necklines of Head-and-Shoulders
Formations, are simply special types of trendlines.
Suppose we start with a Major Bottom point and describe how a series of Up Trendlines
might develop therefrom. To make this first illustration simple, let us assume the Bear
ATCHINSON, TOPEKA, & SANTA FE SF
1935–1936
OCTOBERN OVEMBERD ECEMBER JANUARYF EBRUARYM ARCH
80
76
72
68
64
60
56
52
48
Sales
100’s
50
40
30
2010
5 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 14.2 This 1935–1936 daily chart of Atchison illustrates how the latter part of a long, strong
Intermediate Advance may accelerate away from its trendline. Notice the action in late January and
early February. Prices dropped back to 66 in April 1936 after this Up Trendline was broken at the
end of March. Note also at the point at which the December 1935 reaction met Support, the trendline
coincided with a Triangle apex level. Such “coincidences” appear frequently in technical studies.
210 Technical Analysis of Stock Trends
Market Bottom in our stock consisted of a Rectangle area between 6.5 and 8, and the last
move in this formation arose from the 6.5 level, broke through the pattern’s Top at 8, and
proceeded to 9. From 9, prices reacted to 8 and then headed back up again. As soon as this
last rally had gone far enough to leave the dip to 8 showing in the clear as a Minor Bottom,
we could draw our first Up Trendline because we then had two Bottom points, the second
(8) higher than the first (6.5), to fix its slope. This would be a Minor Up Trendline. We would
rule it in lightly on our chart in pencil and extend it on up and ahead for, perhaps, a week
or more. (It will help you to visualize our example if you sketch it on a scrap of chart paper.)
To proceed, suppose prices push up to 10, then move sideways for a few days, 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 they run into supply again
without making much progress, quickly make a fourth contact with the trendline, hesitate,
and then break down through it. If prices now close clearly below the line and if there has
been some pickup in trading volume evident on the penetration, we may conclude our
first Minor Trend is completed, plus our stock either will build some sort of Consolidation
Pattern before it stages another advance or it will suffer a more extensive “Correction” than
any of the brief dips it registered during its first Minor Upswing.
The whole Minor Uptrend we have described as an example in the foregoing paragraphs
might well have run its course in two weeks; our first trendline would then have been very
steep—too steep, obviously, to hold for any very long period of time. Now, let us assume
a series of downward fluctuations produces the more extensive correction that we have
foreseen as one probability following the trendline break that carries prices back to the
Support Level set up at the Top of the original Rectangle, that is, at 8. (From our previous
Support–Resistance studies, we would recognize this as a prime “buy spot.”) Assuming
CRANE COMPANYC R 1945
JANUARYF EBRUARYM ARCH APRILM AY JUNE
XD .25
XD .25
S S
H36
34
32
30
28
26
Sales
100’s
125
100
75
50
25
6 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 14.3 Trendlines that defined the short-term swings in Crane Company in 1945. Note three
Bottoms formed on the first up-line and the third rally (late February) in this advance failed to reach
a line drawn across the earlier Tops parallel to the Basic Trendline. A failure of this sort frequently
precedes a break in the 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 this chapter. The
downtrend in March assumed a Wedge form. Observe how the April 6 reaction met Support at its
previously penetrated Top line. In June, a rally met Resistance at the previously broken Up Trendline.
Such Pullbacks are common. The small Complex Head-and-Shoulders in June was never completed
because prices did not break down out of it by the required margin.
211Chapter fourteen: Trendli nes and Channels
that subsequent developments pursue a normal course, prices should not linger long at
8, but should start promptly on a new series of advancing fluctuations. As soon as this
becomes evident and the new Bottom at 8 is “in the clear,” we can rule in a new trendline
across the original base point at 6.5 and the new point at 8. This should be, and probably
is, an Intermediate Up Trendline that will not be penetrated for several weeks, maybe for
several months, until the Intermediate Advance tops out.
Subsequently, if that Intermediate Top takes the form of a Head-and-Shoulders Reversal
Pattern, our Intermediate Up Trendline may be broken by the recession from the top of the
head to the neckline. As a rule, however, the final advance in a strong Intermediate Move
accelerates far enough away from the extended trendline to leave room (to the right on the
chart) for considerable pattern construction before the line is again touched a


kes the form of a Head-and-Shoulders Reversal
Pattern, our Intermediate Up Trendline may be broken by the recession from the top of the
head to the neckline. As a rule, however, the final advance in a strong Intermediate Move
accelerates far enough away from the extended trendline to leave room (to the right on the
chart) for considerable pattern construction before the line is again touched and penetrated.
Hence, the actual puncturing of the trendline is more apt to occur either on the decline
from the right shoulder to the neckline, or at about the same time as prices break down
through the neckline to complete the Head-and-Shoulders signal. It is surprising to see how
often the two lines, neckline and trendline, are broken simultaneously . In other instances,
and there are many of them also, in which the trendline is the first to be punctured, perhaps
shortly after prices turn down from the right shoulder, we do not have to wait for a neckline
break but can take action at once. Here is one type of trendline indication that produces a
working signal a little earlier, and often at a much more favorable price level, than is given
by the completion of a Reversal Formation.
Arithmetic versus logarithmic scale
By this time, the more mathematically inclined among our readers must have begun to
ponder the difference between trendlines projected on the ordinary or arithmetic scale
COMMERCIAL SOLVENTS CV
1946
JANUARYF EBRUARYM ARCH APRILM AY JUNE
32
30
28
26
24
22
20
Sales
100’s
250
200
150
100
50
51 21 92 62 91 62 32 91 62 33 06 13 20 27 41 11 82 5 18 15 22 29
Figure 14.4 Intermediate Downtrend and Uptrend in Commercial Solvents in 1946. Note the
increased volume on the March 30 penetration of the basic Down Trendline (and, at the same time,
a breakout from a small Head-and-Shoulders Bottom). The drop through the lower parallel at the
end of February had no technical significance. 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, was
the final Bull Market Top.
212 Technical Analysis of Stock Trends
and on the logarithmic or ratio scale. A series of points that fall on a perfectly straight,
up-sloping line on arithmetic chart paper will, when transferred to a semilogarithmic sheet,
produce a curved line that rises sharply at first and then gradually rounds over. Points that
fall on a straight line on a semilogarithmic sheet will produce an accelerating curve on
an arithmetic sheet, a line that slants up more and more steeply the farther it is projected.
As a matter of fact, this variance is of little or no importance in defining Minor Trends,
as they seldom run far enough for the dissimilar characteristics of the two types of scales
to become effective. The same holds true for average Intermediate Moves of normal slope.
However, when it comes to very long and strong Intermediates, the divergence may become
marked and may make a considerable difference in the time and level of ultimate trendline
penetration. Therein lies one of the strongest reasons for using semi-logarithmic paper in
charting stocks for technical analysis. Let us postpone further discussion of this point until
we take up Major Trends and go on now with the Intermediate Lines that are much the
same on either type of scale, concentrating on Intermediate Uptrends. (Intermediate Moves,
rather than Minor, are emphasized for the obvious reason Minors are of little practical
importance in either trading or investing.)
PHILLIPS PETROLEUM P 1935–1938
64
60
56
52
48
44
40
38
36
34
32
30
28
26
24
22
20
19
18
17
Sales
100’s
1000800600
400
200
ND JF SO ND JF MMMAJ JA SO ND JFJJ ASOJA M MA M A
1935 1936 1937 1938
Figure 14.5 Valid trendline penetration and its normal consequences—Reaction or Consolidation—is
illustrated on nearly every chart in this chapter and on many others throughout the book. This weekly
chart of Phillips Petroleum is reproduced here to show an outstanding exception. The Intermediate
Up Trendline projected 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 forming since February, with a critical neckline at 52.
And the then-current Bull Market had already run for four years; “P” had come all the way up from 2!
Cover up the chart from July 1, 1937 , and you will agree there was plenty of reason for any technician
to sell at once without waiting for the 52 neckline to be broken. But this, as we have said, was one of
the exceptions that occurs to all technical patterns and rules. “P” turned right around and shot up to
64 before it was finished. Nevertheless, developments such as this carry a valuable warning. They very
seldomly appear unless the Major Trend has almost run out; any further rise is dangerous to follow.
213Chapter fourteen: Trendli nes and Channels
PARA MOUNT PICTURES PX
1945–1946
OCTOBERN OVEMBERD ECEMBER JANUARY FEBRUARY MARCH
XD .50C
76
72
68
64
60
56
52
48
44
40
Sales
100’ s
125
100
75
50
25
61 32 02 73 10 17 24 18 15 22 29 51 21 92 62 91 62 3 29 16 23 30
Figure 14.6 Double Trendlines (see next section) usually are not evident until after a trend has
run for several months. In Paramount’s accelerated phase of Intermediate Uptrend, which began
in October 1945, the double nature of the basic trendline was not 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 the Bull Market Top.
BETHLEHEM STEEL BS
1945
JULY AUGUST SEPTEMBERO CTOBER NOVEMBERD ECEMBER
96
88
80
76
Sales
100’s
125
100
75
50
25
71 42 12 84 11 18 25 18 15 22 29 61 32 02 73 10 17 24 18 15 22 29
Figure 14.7 Trend Channels in Bethlehem Steel in 1945. Prices burst out of the 92–98 Horizontal
Channel (Rectangle) on the upside in January 1


ne was not decisively penetrated
downside until May, at the Bull Market Top.
BETHLEHEM STEEL BS
1945
JULY AUGUST SEPTEMBERO CTOBER NOVEMBERD ECEMBER
96
88
80
76
Sales
100’s
125
100
75
50
25
71 42 12 84 11 18 25 18 15 22 29 61 32 02 73 10 17 24 18 15 22 29
Figure 14.7 Trend Channels in Bethlehem Steel in 1945. Prices burst out of the 92–98 Horizontal
Channel (Rectangle) on the upside in January 1946 and went on to 114. A short-term trader might
have sold around 94–96 in early November (because of the uptrend break) and rebought at 99 in
January on the Rectangle breakout. (See discussion of Channels.)
214 Technical Analysis of Stock Trends
PAN AMERICAN AIRWAYSP N
1945–1946
DECEMBER JANUA RY FEBRUARY MARCHA PRIL MAYJ UNEJ ULYA UGUSTS EPTEMBER
30
28
26
24
22
20
19
18
17
16
15
14
Sales
100’s
500400
300
200
100
G
24 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 53 10 17 24 31 7 14 21 28
Figure 14.8 A 10-month downtrend, extraordinarily long and straight, which was nicely defined by
Double Basic Trendlines above the Price Channel and also by a double set of Return Lines below it.
The Major Top started with a strong One-Day Reversal on December 3, 1945 and worked out into a
Descending Triangle that broke February 19, 1946. The Symmetrical Triangle beginning to appear
in September 1946 also broke out downside.
SOUTHERN PACIFICS X
1945
APRILM AY JUNEJ ULYA UGUSTS EPTEMBER
RL
RL
IUT
IDT
56
52
48
44
40
Sales
100’s
250
200
150
100
50
71 42 12 85 12 19 26 29 16 23 30 71 42 12 84 11 18 25 18 15 22 29
Figure 14.9 Well-marked Intermediate Basic Trendline and Return Lines in Southern Pacific, 1945.
Note the Flags within Trend Channels—an up Flag in June and a down Flag in August. The Uptrend
Channel, which began August 22, ran until February 1946.
215Chapter fourteen: Trendli nes and Channels
To go back to first principles, granting that price advances trend up in more or less
straight lines, it follows that finding and drawing the lines that accurately define those
trends, they will serve two purposes:
 1. When the trendline is broken (i.e., when prices drop down through it in decisive
fashion), it signals the advance has run out. It calls time for the intermediate-term
trader to sell out that issue and to look for reinvestment opportunities elsewhere.
 2. When a small Top Reversal Pattern forms on the chart of an issue well up and away
from that issue’s Intermediate Up Trendline, so that there apparently is room for
HUDSON MOTORS HT
1945
JULY AUGUSTS EPTEMBERO CTOBER NOVEMBER DECEMBER
34
32
30
28
26
Sales
100’s
125
100
75
50
25
71 42 12 84 11 18 25 18 15 22 29 61 32 02 73 10 17 24 18 15 22 29
Figure 14.10 Note the extent by which prices failed to come down to their Return Line in late
November measured the distance by which they advanced through and above the Basic Down
Trendline in early December. This rule is stated in the discussion of Trend Channels.
CONSOLIDATED VULTEE F
1945
JANUARYF EBRUARYM ARCH APRILM AY JUNE
26
24
22
20
19
18
Sales
100’s
250
200
150
100
50
61 32 02 73 10 17 24 31 01 72 43 1714 21 28 51 21 92 6 29 16 23 30
Figure 14.11 Six months of an Uptrend Channel that actually started to form in December 1943. It
was broken downside in August 1945.
216 Technical Analysis of Stock Trends
the downside implications of the Reversal Formations to be carried out before the
trendline is violated, then the intermediate-trend trader may well decide to ignore
the small Reversal Pattern. He can hold on so long as the trendline holds.
The advantages of the first-named trendline function are obvious. Those of the
second, although less obvious to the inexperienced, are equally important to the investor
who has learned it is an expensive practice to switch out 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 find and draw the line
that accurately defines the Intermediate Trend, and then to recognize when that line has
been broken in decisive fashion. Our earlier quick review of how a trendline is constructed
did not attempt to cover these points thoroughly.
Tests of authority
The following are some of the tests that may be applied to judge the technical validity, or
authority, of an Up Trendline:
 1. The greater the number of Bottoms that have developed at (or very near) a trendline in
the course of a series of Minor Up Waves, the greater the importance of that line in the
technical sense. With each successive “test,” the significance of the line is increased.
NASH – KELVINATOR NK 1946
APRILM AY JUNE JULY AUGUST SEPTEMBER
MUT
IDT
RL
24
22
20
19
18
17
16
Sales
100’s
125
100
75
50
25
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
Figure 14.12 The downtrend that started in June 1946 in Nash–Kelvinator, signaled by the break
of both its Intermediate and Major Up Trendlines (MUT) on July 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 Return Line, drawn parallel to it across the June 20 low, held in late July but
remained intact for only a few days at the end of August. The August rally in both price and volume
pattern showed Bear Market characteristics. Compare this chart with Figure 8.25 and you will see
that a Major Double Top was signaled on July 23.
217Chapter fourteen: Trendli nes and Channels
A first and tentative Up Trendline can be drawn as soon as two Bottoms have formed,
the second higher than the first, but if prices move back to that line a third time,
make a third Bottom there, and start a renewed advance, then the validity of that line
as a true definition of the trend has been confirmed by the action of the market. Should
a fourth Bottom later form on it, and prices move up away from it again, its value as a
trend criterion is very consid


ms have formed,
the second higher than the first, but if prices move back to that line a third time,
make a third Bottom there, and start a renewed advance, then the validity of that line
as a true definition of the trend has been confirmed by the action of the market. Should
a fourth Bottom later form on it, and prices move up away from it again, its value as a
trend criterion is very considerably enhanced.
 2. The length of the line, that is, the longer it has held without being penetrated downside
by prices, the greater its technical significance. This principle, however, requires some
qualification. If your trendline is drawn from two original Bottoms that are very
close together in time—say, less than a week apart—it is subject to error; it may be
too steep or (more often) too flat. If the latter, prices may move away from it and stay
high above it for a long time; they may then turn down and have declined well along
in an Intermediate Correction before the trendline thus drawn is reached. But if the
trendline has been drawn from Bottoms that are far enough apart to have developed
as independent wave components of the trend you are trying to define, with a good
rally and “open water” between them, then it is more apt to be the true trendline.
Greater weight should be given to the number of Bottoms that have formed on a
trendline (Test 1) than to its length alone (Test 2).
 3. 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. A very steep line can easily be broken
by a brief sideways Consolidation move—as, for example, by a compact Flag forming
on an advance of the “mast” type—only to have prices shoot up again in another
extensive advance. Such steep lines are of little forecasting value to the technician. The
flatter, more nearly horizontal the trendline, the more important it is technically and,
in consequence, the greater the significance of any downside break through it.
R . H . MACY MZ 1946
APRILM AY JUNE JULY AUGUST
NL–2
F– 1
F–2
F–3
S
SRL
IUT
H
64
60
56
52
48
44
Sales
100’s
50
40
30
20
10
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
Figure 14.13 The decline that took Macy down through an Intermediate Up Trendline (IUT) in June
1946 turned out to be also the drop from the head of a “Flat-Shouldered” 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 to each. F1, F2, and F3 are tentative Fan Lines. Prices were finally able to
clear F3 in December, but by that time, a Primary Bear Market had been signaled, so the Fan Rule no
longer applied. Fans call the turn only on Secondary (Corrective) Moves.
218 Technical Analysis of Stock Trends
But “steep,” as applied to stock trends, is a relative term and one that we defies exact
definition. Experience, which can only be gained by studying many charts and by actually
building and working with them over a period of many months, brings an almost intuitive
ability to distinguish between a trendline that is “too steep to hold” and one whose angle of
rise is reasonable and should be maintained until such time as the trend is actually reversed
from Intermediate Up to Intermediate Down. Trend slopes will vary from stock to stock
according to their characteristic market habits. They will vary also according to the stages
of the Primary Cycle—tending to become somewhat steeper in its later phases. The more
chart 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 interpretation of most other technical patterns and phenomena as well as to trendlines.)
ARKANSAS BEST ABZ1 987
JANUARY FEBRUARY MARCHA PRIL MAYJ UNEJ ULY AUGUST
S
H
F1
F2
F3
S
NL
36
34
32
30
28
26
24
22
20
19
18
17
16
15
14
13
12
11
Sales
100’s
1000800600
400200
7 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 15
XD.0 X9D .09
ARKANSAS BEST
30
80 81 82 83 84 85 86 87
25
20
15
10
5
Figure 14.14 “ ABZ” dropped sharply following its late January high, capping off a nearly
uninterrupted two-year rally. But despite the rapidity and severity of the Pullback, it was, in fact, a
picture-perfect reaction, which stopped just above excellent long-term Support at the 1983 high after
retracing almost exactly 50% from its January peak. Not only is the reaction a classic, but so, too, is
the Fan Line development, which, when coupled with the recently completed Head-and-Shoulders
Bottom, suggests “ ABZ” has reversed its short-term downtrend.
219Chapter fourteen: Trendli nes and Channels
One clue to relative steepness is afforded to those who employ the TEKNIPLAT
semilogarithmic chart sheet, which has been used for most of the illustrations in this
book. When projected on this scale, Intermediate Uptrends on the daily charts, in the great
majority of issues selling in the 10 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 see
BARBER ASPHALTA S
1946
JANUARYF EBRUARYM ARCH APRILM AY JUNE
XD .25C
XD .25CF 2F 1
F 3
56
52
48
44
40
38
36
Sales
100’s
50
40
30
20
10
51 21 92 62 91 62 32 91 62 33 06 13 20 27 41 11 82 5 18 15 22 29
Figure 14.15 A valid application of the Three-Fan Principle. Note prices after they pushed up
through F1 in March fell back to it but did not repenetrate it. When F2 was broken in late March,
prices came back to it at the end of April but did not go below it. F3 was surmounted in May. This
was a Bull Market Reaction; “ AS” made its final Top above 64 in August. The March–May pattern
might be called a weak Double Bottom.
DELAWARE & HUDSON DH
1944
JULY AUGUSTS EPTEMBERO CTOBER NOVEMBER DECEMBER
38
36
34
32
30
Sales
100’s
125
100
75
50
25
81 52 22 951 21 92 62


as broken in late March,
prices came back to it at the end of April but did not go below it. F3 was surmounted in May. This
was a Bull Market Reaction; “ AS” made its final Top above 64 in August. The March–May pattern
might be called a weak Double Bottom.
DELAWARE & HUDSON DH
1944
JULY AUGUSTS EPTEMBERO CTOBER NOVEMBER DECEMBER
38
36
34
32
30
Sales
100’s
125
100
75
50
25
81 52 22 951 21 92 62 91 62 33 0714 21 28 41 11 82 5 29 16 23 30
Figure 14.16 Try the Three-Fan Principle on this chart of the late 1944 Bull Market Reaction out
of a Symmetrical Triangle in “DH.” F1 should be drawn from the August 30 high down across the
September 12 closing. F2 is already marked on the chart but not labeled. F3 would extend from
August 30 across the Rally Top of November 9. It was surmounted on increased volume November
21. The mid-September to November price pattern looked at first like a Descending Triangle, but
volume began to rise in October.
220 Technical Analysis of Stock Trends
how often the trendline falls very close to the 30-degree slope in stocks of average volatility
and activity. Thin, highly speculative issues and heavy investment stocks offer exceptions,
the former usually steeper and the latter flatter. The semilogarithmic scale has the virtue
of reducing all movements, regardless of price level, to a ratio or percentage basis. On a
straight arithmetic scale, the trendline will ordinarily be steeper on a stock trading 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 be much steeper than on the daily plotting. Different scaling will produce different
angles. It is pure happenstance that TEKNIPLAT sheets tend to produce the 30-degree
ascending line.
Unfortunately, TEKNIPLAT paper is no longer produced but a comparable analysis is
easily produced with software from packages and online.
Validity of penetration
We have these three criteria, then, for appraising the authority or accuracy of an Intermediate
Up Trendline: (1) the number of times it has been “tested” or contacted without breaking,
BUCYRUS ERIE CO.B Y 1984
MARCHA PRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBERN OVEMBER DECEMBER
F1
F2
F3
30
28
26
24
22
20
19
18
17
16
15
14
13
12
11
Sales
100’s
1000800600
400
200
10479
7621
17 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 1 8 15 22 29
XD. 11 XD. 11
Figure 14.17 In a downtrend throughout the first half, “BY” gave back a large part of its 1983 rally
by mid-summer. Nevertheless, the 1982 low held the Bears in check, and over the following several
months, this issue etched out an excellent Fan Pattern. Fan Line 1 gave way in mid-September on a
high-volume penetration. The advance quickly lost 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 on good volume. Following a five-week correction, “BY” charged through Fan Line
3 on the best volume of the three breakouts.
221Chapter fourteen: Trendli nes and Channels
(2) its length or duration, and (3) its angle of ascent. Given a trendline that, by the application
of one or more of these criteria (preferably by at least two of them), appears to be a reasonably
accurate delimiter of the trend, our next problem is to determine when it has been finally
and definitely broken.
Again, we can set up three tests or criteria, two of which are practically identical with
the rules laid down in earlier chapters for determining decisive breakouts from Reversal or
Consolidation Formations. The first is extent of penetration . To be decisive, prices must not
only push through the line but also close beyond it by a margin equal to about 3% of the
stock’s price. This does not need to be accomplished in a single day, although it often is. The
3% penetration may come as a result of two or three days of gradual decline.
The second is volume of trading . We saw how activity should always be expected 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, in many cases, volume does not show
much increase on the first day of a down-break from Descending Triangles, for example,
but usually it picks up rapidly as the decline proceeds. In our present discussion, we are
dealing with Up Trendlines, and their penetration is, therefore, analogous to a downside
breakout. 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 necessary for volume to have expanded
much at that point to confirm the validity of the penetration.
The fact is, however, that the breaking of an Intermediate Up Trendline, much more
often than not, is attended by some visible intensification of trading activity. To that extent,
then, an increase in volume may be regarded as confirmation of a decisive penetration. It is
a particularly useful adjunct in borderline cases. If, for example, prices start to decline from
a point somewhat above the trendline, move down through it on conspicuously expanding
turnover, and close beyond it, say, only 2% of the price but at or near the bottom of the day’s
range, then 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 commitment by the shakeout
move that cracks down through a trendline with a great flurry of activity—perhaps several
minutes of late tape—and then turns up 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 that
particular moment is concerned. But watch the next few days’ performance very closely; the
technical situation is evidently critical, or else a shakeout could not have been


reat flurry of activity—perhaps several
minutes of late tape—and then turns up 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 that
particular moment is concerned. But watch the next few days’ performance very closely; the
technical situation is evidently critical, or else a shakeout could not have been easily staged.
The third test is also one that applies particularly to breaks that are borderline so far
as margin of penetration is concerned. Suppose a stock that is quoted in the neighborhood
of 40 declines through a well-established Intermediate Up Trendline and closes 1 or 1 1/ 4
points below it—a margin that is only slightly less than our specified 3%—without much,
if any, enlargement in trading volume. Suppose it fluctuates there for a day or two in a dull
and narrow market and then starts to rally; if there is no pickup in activity on this recovery
move—if prices simply edge up feebly to the underside of the trendline and tend to “round
over” there without being 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 signal that the uptrend
has been decisively broken.
Such a return move as we have described in the preceding paragraph is known as
a Throwback or Pullback. We previously described analogous developments that follow
breakouts from Head-and-Shoulders and other patterns, and we will have more to say
about them in connection with trendlines later on.
The three tests we have been discussing, which help to establish the validity of a
trendline penetration, cannot, unfortunately, be applied inflexibly and without a modicum
222 Technical Analysis of Stock Trends
of judgment. The majority of Intermediate Trendlines can hardly be said to possess the
precision of pattern boundary lines, and even in the latter, some leeway must be allowed.
There are exceptions, as we have taken occasion to remark several times before, to every
technical rule of price action, but judgment in the establishing of significant trendlines and
in interpreting their penetrations does come with experience.
Amendment of Trendlines
When a trendline is broken by a margin less than decisive, and prices subsequently rally
back up through it again, doubt naturally arises as to the continued authority of the original
line. Should it be discarded, revised, or allowed to stand as is?
Here again, judgment and experience must be called into play, but a few general principles
are helpful in deciding. If the original trendlines depended on only 2 points, that is, on the
first two Bottoms across which it was projected and the indecisive penetration occurred when
prices returned to it for the third time, then the line had better be redrawn across the original
first and the new third Bottoms. (Of course, you will not do this until prices have moved up
from the third Bottom point and it has become clearly established as a Minor Bottom.) Or,
you may find in such cases that a new line drawn across the second and third Bottoms works
better; if the first Bottom was a Reversal Day with its closing level well above the low of its
range, you may find this new line, when extended back, strikes just about at that closing level.
If, on the other hand, the original trendline has been “tested” one or more times after
it was drawn—if, that is, a third and perhaps a fourth Bottom have formed on it without
penetrating it and have thus “confirmed” it—then the subsequent indecisive penetration
may be disregarded and the original line considered to be still in effect.
An intraday break through an established trendline that, however, does not result in
prices closing beyond the line may be disregarded and the line left as is. In fact, as has
already been suggested, the closing prices frequently make a better trendline than the
extreme intraday lows of successive Bottoms, which is most apt to be true with “thin”
stocks subject to erratic swings. 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 a trendline. Sometimes,
after a line has been projected up across the first two Minor Bottoms in an advancing trend,
a third Minor Bottom will form, not on that line, but well above it. In such cases, let the
original line stand, but draw in a new one across the second and third Bottom points, and
watch developments. If the rally from the third Bottom peters out quickly, and the new
trendline, as a consequence, is soon broken, then the original trendline is 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 and the new one regarded as the better trend definer.
Double Trendlines and trend ranges
In the course of your “cutting and trying” in an effort to fit a good line to an Intermediate
Uptrend, you may find that two parallel lines, perhaps a point or so apart in a stock selling
in the 30s, will define the true trend pattern much better than any single line that can be
drawn. Sharp Bottoms and shakeout 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 or
inner line. Or the two lines will mark off a range somewhere within which successive Minor
Down Waves tend to halt and reverse.
223Chapter fourteen: Trendli nes and Channels
Such Double Trendlines are really plentiful, although most chart technicians seem
to be quite unaware of them. It pays to develop an eye 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 critical line lead only to frustr


or
Down Waves tend to halt and reverse.
223Chapter fourteen: Trendli nes and Channels
Such Double Trendlines are really plentiful, although most chart technicians seem
to be quite unaware of them. It pays to develop an eye 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 critical line lead only to frustration and to your finally giving up in disgust.
Trends that you find are best defined by Double Trendlines (or by a very Broad
Trendline, if you prefer) cannot be regarded as having ended until the outer, lower line
has been decisively penetrated. In that connection, note what we said at the beginning of
this topic: sharp, shakeout Bottoms tend to fall on the outer line. The recoveries from such
Bottoms are usually just as sharp, and prices, therefore, rally back above the upper, inner
line quickly. Warning of an impending break in the trend is given when prices come down
to the outer line steadily, rather than by the quick “shake” type of reaction, and 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 Channels
At the start of this trend study, we applied the term Basic Trendline to the line that slopes
up across the Wave Bottoms in an advance and to the line that slopes down across the
Wave Tops in a decline. Furthermore, we noted the opposite Reversal Points, that is, the
wave crests in an advance and the wave troughs in a decline, were, as a rule, less clearly
delimited. That is one of the reasons why all of our discussion up to this point has been
devoted to Basic Trendlines. Another reason is that the technician’s most urgent task
is to determine when a trend has run out, and for that purpose, the Basic 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 sometimes develop along a line that is approximately parallel to
the Basic Trendline projected along their Bottoms. This parallel might be called the Return
Line because it marks the zone where reactions (return moves against the prevailing trend)
originate. The area between Basic Trendline and Return Line is the Trend Channel.
Nicely defined Trend Channels appear most often in actively traded stocks of large
outstanding issue—least often in the less popular and the relatively thin equities that
receive only sporadic attention from investors. The value of the Trend Channel concept
for the technical trader would hardly seem to require extended comment here; its tactical
utilization is discussed in the second half of this book.
Its greatest utility, however, is not what usually appeals to the beginner when he first
makes its acquaintance, namely, the determination of good profit-taking levels. Experienced
technicians find it more helpful in a negative sense. 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 in an Intermediate Advance) is taken as a sign of deterioration in the trend.
Furthermore, the margin by which a rally fails to reach the Return Line (before turning
down) frequently equals the margin by which the Basic Trendline is penetrated by the
ensuing decline before a halt or Throwback in the latter occurs.
By the same token, given an established Trend Channel, when a reaction from the
Return Line fails to carry prices all the way back to the Basic Trendline but bottoms out
somewhere above it, the advance from that Bottom will usually push up out of the channel
on the top side (through the Return Line) by a margin approximately equal to the margin
by which the reaction failed to reach the bottom of the channel (Basic Trendline).
224 Technical Analysis of Stock Trends
Experimental Lines
Your experienced technician, in fact, is constantly drawing trendlines of all sorts—Minor,
Intermediate, and Major—on his charts. He will first very lightly pencil them in wherever
he can find an excuse to draw one. Many will quickly prove to be of no significance; those
he may erase. Others will “stand out,” showing evidence of technical authority, which he
will make heavier or color, as suggested later on. He will be constantly on the watch for
Double Trendlines and will draw tentative Return Lines to mark off possible channels at
every opportunity. As soon as he has what appears to be a Basic Up Trendline, for example
projected from two Bottoms, he will go back to the Top of the rally between those two
Bottoms and draw from that parallel to the Bottom Trendline. If the next rally comes up
to that parallel, stops there and turns down, he has a probable Return Line and channel
established.
This practice of drawing in and experimenting with every trendline, which the price
action permits or suggests, is earnestly recommended to the reader of this book, particularly
if the technical approach is new to him. It is the quickest way—in fact, the only way—
of acquiring the experience we have stressed as essential to recognition, judgment, and
utilization of trendline implications in trading.
Perhaps we should add here one “don’t” for the beginner. You will have noted we have
not mentioned a line projected from a Bottom to a Top, 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 price track. (Prices may cross their extensions later, but this should not
have happened 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 to the Top of the right shoulder
of a Head-and-Shoulders Formation, thus cutting thro


ore Bottoms, or two or more Tops. They should never be drawn to
cross through the price track. (Prices may cross their extensions later, but this should not
have happened 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 to the Top of the right shoulder
of a Head-and-Shoulders Formation, thus cutting through the head, but such a line would
have no technical validity.
Consequences of Trendline penetration: Throwbacks
At the beginning of this chapter, we mentioned the probable consequences of a breakdown
through an Intermediate Up Trendline. To repeat, if an Intermediate Up Trendline has
been constructed, has qualified as technically significant by the tests previously discussed,
and has then been decisively broken, the inference is the uptrend is finished. And the
consequences to be 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 which of these two consequences
is the more likely. In either event, the Intermediate Trend trader will certainly look twice
before attempting to find further profit in that particular situation at that time.
A more immediate but less important probable consequence of trendline penetration
has also been mentioned—the “Pullback.” Pullbacks that follow breakouts from Reversal
and Consolidation Formations have been described in our earlier studies of those price
patterns. It is easy to understand why a rally that develops after prices break out through
the lower boundary of a Rectangle, for example, will be stopped when it gets back to that
boundary by the Resistance (supply) now residing there. Support–Resistance Theory
enables us to rationalize most of the Throwback moves that occur after prices have broken
out of other types of Reversal or Consolidation Areas. The Pullbacks that follow trendline
penetrations cannot be thus rationalized; yet they occur much more frequently, and they
appear to be stopped much more exactly at the old trendline level than is the case with Area
Formations. Why should prices, after they have thrust down through a rising trendline,
225Chapter fourteen: Trendlin es and Channels
perhaps for several points, turn back up and ascend to or very near the old trendline, stop
there, and then go off in renewed decline? The Top of that Pullback Rally may be 2 or 3
points above the original penetration level, because the trendline is sloping up all the
time; nevertheless, there it stops, falters, and gives up. No one knows why supply should
overcome demand or why Resistance should be so plainly evident at that particular point
whose level is determined by two variants—the slope of the line and the time it is reached.
You cannot reasonably expect a Pullback Rally to climb all the way back to a trendline
that is ascending at a very steep angle, which may mean the attainment of a new high price
for the entire Intermediate Uptrend; yet even that happens in more than just a few cases.
What can be counted on in the great majority of typical Up Trendlines (those that slant up
at a normal or fairly flat angle) is that after the line has been broken, a Pullback Rally will
develop, either in a few days or in the usual Minor Wave tempo and will carry prices back
up to the projected trendline.
Throwbacks do not occur, it should be noted, when prices erupt through a Return
Line, that is, break out of the top side of an Uptrend Channel. Or, more correctly stated, the
Return Line does not function as a Support against a Throwback after prices have gone
through it. An unusually strong upswing in a Rising Trend Channel may carry beyond the
top of the Channel as defined by its Return Line, but the next reaction may go right back
down through it without evidencing any hesitation at its level.
The Throwback is one of the mysteries in trendline price action to which we alluded at
the outset. The technical analyst who studies trends and trendlines over any considerable
period will discover many other even more mysterious phenomena that cannot find space
in this treatise, as no way has yet been found to put them to practical use in trading and
investing. They are extraordinarily interesting in retrospect, but they are not subject to
forecast.
Intermediate Downtrends
In all of the foregoing discussion of trends and trendlines, we have concentrated on uptrends;
we have, in fact, had in mind specifically Intermediate Advances in the direction of the
Primary Trend, that is, within a Major Bull Market. Those particular trends are most apt
to develop “normally” and are most amenable to trendline definition. Intermediate Down
Moves in a Major Bear Market may well be taken up next. Before discussing the respects in
which they differ from Primary Advances, recall that the Basic Trendline on 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 the chart. The Return Line (if any) will define the
Bottom of the channel.
Intermediate (Bear Market) Downtrends are far less regular and uniform in their
development than Bull Market Advances. Their angles of decline are characteristically
steeper, and this is particularly true, of course, of the Panic Moves typical of the second
phase of a Bear Market, as in our discussion of Major Trends in Chapter 3. Moreover, prices
have a tendency to drop away from any trendline drawn across the first two Rally Tops;
in other words, to curve down or accelerate as the move proceeds. This shows plainly on
an arithmetically scaled chart and even more conspicuously on a semilogarithmic sheet.
The practical results of this down-curving tendency are not so important, insofar as it
delays the penetration of the original trendline and, hence, the giving of a s


om any trendline drawn across the first two Rally Tops;
in other words, to curve down or accelerate as the move proceeds. This shows plainly on
an arithmetically scaled chart and even more conspicuously on a semilogarithmic sheet.
The practical results of this down-curving tendency are not so important, insofar as it
delays the penetration of the original trendline and, hence, the giving of a signal of trend
change. The fact is prices tend to thrash around for some time, making a base at the Bottom
of one of these precipitous declines. In so doing, they work out sideways on the chart and
the trend frequently does not turn up visibly until after the trendline has finally been
226 Technical Analysis of Stock Trends
reached and broken through on the upside after all. Thus, there is justification for drawing
down trendlines and keeping them in view even though they may seem, for some time,
simply to travel off into space with no apparent relevance to the actual trend of prices.
It naturally follows from the above that Return Lines on most Bear Market 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 last Intermediate
Downswing in a Major Bear Market is the last Primary Move that leads to the final, long-
term Bottom, which is usually cleaner, more regular, and less precipitous—in other words,
it is a more nearly normal trend of the sort we expect to find in most Intermediate Advances
in a Bull Market (except that it slants down instead of up). This interesting habit is, as we
said, of practical importance. Knowing it, we have an additional and very useful 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 in another but less active and more
orderly decline, and this decline develops and follows a good trendline. Watch it closely
though. If this Intermediate holds to its steady and not-too-steep downward course—if
its trendline is contacted several times by Minor Rallies or 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 a Major Turn, that is, the
inception of a new Bull Market.
Corrective trends: the Fan Principle
In this study of Intermediate Trendlines, we have left to be taken up last the subject of
Secondary or Corrective Trends. These are the Intermediate Declines that interrupt the
Primary Advances in a Bull Market, and the Intermediate Recoveries that alternate with
Primary Declines in Bear Markets.
Intermediate Reactions against the Major Direction of the market take a variety of
forms. Sometimes, as we have seen in our earlier study of chart patterns, they run out
into Consolidation Formations—Triangles, Rectangles, and so on—in which the net price
reaction is of minor consequence, but time is consumed in backing and filling before the
Primary Trend can be resumed. In such cases, there is no basis for drawing an Intermediate
Trendline, nor is one needed for any practical purpose.
At the other extreme, so to speak, we find Corrective Swings that develop as a more or
less orderly straight-line return of moderate slope to the nearest good Intermediate Support
or Resistance Level, retracing perhaps a third to a half of the preceding Primary Swing.
These reactions produce good trendlines, as a rule, and the eventual penetration of their
trendlines is a good technical signal of Reversal. Intermediate Corrections clearly of this
type are relatively rare.
A third form taken by Intermediate Corrections is nearly as common as the first named
above (Consolidation Pattern) and much more common on the charts than the second. In a
Bull Market, it starts with a sharp reaction that proceeds for several days—perhaps for as
much as two weeks—producing a steep Minor Trendline. This line is broken upside by a
quick Minor Rally, after which prices slide off again in a duller and less precipitate trend.
A second Minor Trendline may now be drawn from the original high point across the Top
of the upthrust that broke the first trend. This second trendline is broken by another partial
recovery thrust, and a third and still duller and flatter sell-off ensues. A third trendline
can now be drawn from the original high across the Top of the second upthrust. The whole
227Chapter fourteen: Trendli nes and Channels
move, by this time, has taken roughly and irregularly a “Saucering-out” form. The three
trendlines drawn from the original Reversal points from which the Corrective Decline
started, each at a flatter angle than its predecessor, are known as Fan Lines. The rule is when
the third Fan Line is broken upside, the low of the Intermediate Correction has been seen.
There are exceptions to this rule—as there are to every so-called rule of technical chart
analysis. Rarely, a correction of this type will go on to make another dip to a new low for
the whole corrective move before prices really start to round up again. But the Three-Fan
Principle works in the great majority of cases. Moreover, it offers the trader an opportunity
to take a position at a point at which he can logically employ a very near stop order and,
thus, limit his loss to a controlled amount if the rule does not work out.
It is interesting to note that prices consistently throw back 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 a time the Saucer picture.
The Three-Fan Rule works just as well in calling the turn on Intermediate Recoveries in
a Bear Market, the majority of which take the rounding form that is adapted to its use. Note,
however, that the Fan Principle is normally


s 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 a time the Saucer picture.
The Three-Fan Rule works just as well in calling the turn on Intermediate Recoveries in
a Bear Market, the majority of which take the rounding form that is adapted to its use. Note,
however, that the Fan Principle is normally applied only to corrective moves, that is, to
determine the end of Intermediate Reactions in a Bull Market and the end of Intermediate
Recoveries in a Bear Market.
Major Trendlines will be outlined in the following chapter, but before we leave this
study of Intermediate Trends, it will be well to state again that the 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, few attempt
to use trendlines almost exclusively, but the majority have found they are best employed
as an adjunct to other technical data.
Technical analysis of a stock chart is something like putting together a jigsaw
puzzle. There are many items to be considered, among them volume, pattern, and the
measurements derived therefrom, Support and Resistance Levels, trendlines, and general
market prospects—and all fit into place to get the complete picture.

229
chapter fifteen
Major Trendlines
In the preceding chapter on Intermediate Trendlines, mention was made of the distinctive
effects produced by arithmetic and semilogarithmic plotting, but it was noted that these
differences were unimportant in connection with Minor Trends or Intermediate Trends of
average duration. When we come to Major Trends, however, we find the difference does
become important. Major Trendlines are illustrated by Figures 15.1 through 15.20.
If you will examine a large collection of arithmetically scaled monthly charts covering
10 years or more of market history, you will quickly see that Bull Trends, in the great
majority of actively traded, more or less speculative common stocks, tend to accelerate. They
start slowly and push up at a steeper and steeper angle as they approach a Major Top. This
up-curving path takes them farther and farther away from any straight trendline drawn
from two Bottom 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 that may be of Major consequence
before their straight trendline is again touched.
Many of the stocks that show such typical accelerating curves in their advance (Major)
Trends on arithmetic paper produce straight trends on a logarithmic scale. As a consequence,
their logarithmic Major Trendlines are broken more quickly, and usually at a higher price
level, when at last their trends do top out and turn down. In the case of such stocks, then,
the logarithmic scale gives a better trend signal.
But there are other stocks—mostly of the more substantial investment or semi-
investment type—that tend to advance in straight arithmetic trends. Consolidated Edison,
General Motors, and Libbey–Owens–Ford Glass are examples. (The trends of these on a
logarithmic scale show a decelerating curve.) Still a third class, made up largely of high-
grade preferred stocks, produces a rounding over or decelerating Bull Trendline even on
the arithmetic scale. And, finally, there are a number of issues whose normal Bull Market
Trendlines fall somewhere between our first two types—that is, they curve up away from
a straight path on the arithmetic scale, but curve over to the right (breaking through a
straight line) on the logarithmic scale. (EN: Fortunately, in this age of computers and easily
processed data, there is analytical software that allows the analyst to instantaneously switch between
the scales. Desktop packages are available[(see Appendix B, Resources] and a number of internet sites
have these capabilities.)
All of which, the reader, at this point, no doubt finds most discouraging. Some stocks
do this and some stocks do that, but what help is there for us in such a mix-up? The answer
lies in studying the history of each issue in which you may be interested. Most stocks do
not change their habits and their technical characteristics much from one Bull and Bear
cycle to the next. An issue, like General Motors, that produces a straight-line Bull Trend
on an arithmetic chart in one Primary Upswing is likely to repeat that performance in
the next. EN10: GM after the fall will, we suspect, retain its previous habits, but that remains to
be seen.
As a matter of interest, stocks do sometimes change over a long period of years.
Companies that were regarded as extremely speculative when their shares were first listed
230 Technical Analysis of Stock Trends
GENERAL MOTORS GM
80
60
40
20
Sales
100’s
4000
2000
1938 1939 1940 1941 1942 1943 1944 1945 1946
Figure 15.1 The straight-line Bull Market Trend of General Motors on an arithmetic monthly chart:
1941 low, 28 5/8; 1946 high, 80 3/8.
HUDSON MOTORS HT
40
30
20
10
Sales
100’s
1000
500
1938 1939 1940 1941 1942 1943 1944 1945 1946
Figure 15.2 The up-curving trend of a speculative motors stock, Hudson Motors. Compare this with
“GM”: 1941 low, 2 5/8; 1946 high, 34.
231Chapter fifteen: Major Tre ndlines
CURTIS PUBLISHING $ 7 PFD. CPC Pr160
120
80
40
Sales
100’s
100
50
1938 1939 1940 1941 1942 1943 1944 1945 1946
Figure 15.3 Typical decurving Major Bull Trend of a high-grade preferred stock. This is Curtis
Publishing $7 .00 Preferred: 1942 low, 12; 1945 high, 154.
CURTIS PUBLISHING COM. CPC
30
20
10
Sale
s
100’s
1200
1000
1938 1939 1940 1941 1942 1943 1944 1945 1946
Figure 15.4 The accelerating uptrend of the common stock of the same publishing company: 1942
low, 3/8; 1946 high, 26.
232 Technical Analysis of Stock Trends
COMMONWEALTH EDISON CWE
40
30
20
Sales
100’s
800
400
1938 1939 1940 1941 1942 1943 1944 1945 1946
Figure 15.5 A conservative i


high, 154.
CURTIS PUBLISHING COM. CPC
30
20
10
Sale
s
100’s
1200
1000
1938 1939 1940 1941 1942 1943 1944 1945 1946
Figure 15.4 The accelerating uptrend of the common stock of the same publishing company: 1942
low, 3/8; 1946 high, 26.
232 Technical Analysis of Stock Trends
COMMONWEALTH EDISON CWE
40
30
20
Sales
100’s
800
400
1938 1939 1940 1941 1942 1943 1944 1945 1946
Figure 15.5 A conservative investment-type utility stock makes a straight-line Major Bull Trend.
This is Commonwealth Edison: 1942 low, 17 3/8; 1946 high, 36 1/8. Leverage is an important factor
in trends.
INTERNATIONAL HYDRO-ELECTRIC IH
15
10
5
Sales
100’s
400
200
1938 1939 1940 1941 1942 1943 1944 1945 1946
Figure 15.6 The up-curving trend of a low-priced “junior” utility, International Hydro-Electric: 1942
low, 1/4; 1946 high, 15 1/2.
233Chapter fifteen: Major Tre ndlines
HOUSTON OILH O
30
20
10
Sales
100’s
1000
500
1938 1939 1940 1941 1942 1943 1944 1945 1946
Figure 15.7 A speculative oil stock, Houston Oil: 1942 low, 2 1/4; 1946 high, 30. Compare this picture
with “SOH” in Figure 5.8.
STANDARD OIL OF OHIO SOH
30
20
10
Sales
100’s
200
100
1938 1939 1940 1941 1942 1943 1944 1945 1946
Figure 15.8 Straight-line uptrends in an investment oil, Standard Oil of Ohio: 1942 low, 10 1/8; 1946
high, 30. Note: trendline unbroken until 1948.
234 Technical Analysis of Stock Trends
REPUBLIC STEEL RS
40
30
20
10
1938 1939 1940 1941 1942 1943 1944 1945 1946
Figure 15.9 Steel stocks have the speculative or accelerating type of Primary Uptrend, Republic
Steel: 1942 low, 13 3/8; 1946 high, 40 7 /8.
AMERICAN CAR & FOUNDRY AF
80
60
40
20
Sales
100’s
400
200
1938 1939 1940 1941 1942 1943 1944 1945 1946
Figure 15.10 The normal Major Bull Trend of heavy industrial issues is up-curving, American Car &
Foundry: 1942 low, 20; 1946 high, 72 3/8.
235Chapter fifteen: Major Tre ndlines
CELOTEX CORP. CLO
40
30
20
10
Sales
100’s
400
200
1938 1939 1940 1941 1942 1943 1944 1945 1946
2 for 1
Figure 15.11 A low-priced building stock, Celotex Corporation: 1942 low, 6 1/8; 1946 high, 38 1/8.
CLAUDE NEON LIGHTS CEO
10
8
6
4
2
Sale
s
100’s
1000
500
1938 1939 1940 1941 1942 1943 1944 1945 1946
Figure 15.12 A highly speculative, low-priced issue, traded on the Curb Exchange, Claude Neon
Lights: 1942 low, 1/8; 1946 high, 9.
236 Technical Analysis of Stock Trends
LIGGETT & MYERS LM–B
135
105
75
45
Sales
100’s
200
100
1938 1939 1940 1941 1942 1943 1944 1945 1946
Figure 15.13 The tobacco stocks follow the investment type of trend. This is Liggett & Myers: 1942
low, 50 1/2; 1946 high, 103 1/2. Note the Double Trendline.
CORN PRODUCTS REFININGC FG
70
60
50
40
Sales
100’s
400
200
1938 1939 1940 1941 1942 1943 1944 1945 1946
Figure 15.14 High-grade food issues (Corn Products Refining) resemble the tobaccos: 1940 low, 40
1/4; 1946 high, 75 3/4.
237Chapter fifteen: Major Tren dlines
may attain an increasingly important and stable position in the general economy, with the
result that, eventually, their stock acquires a solid investment rating. Their Bull Market
Trends will then gradually change from an up-curve to a straight line and, finally, to a
decelerating curve. Other old, established corporations may lose position and rating, as
well as shift from the investment type of trendline to the speculative. But, it is true in
general, that Major Patterns do repeat.
If you are keeping your own set of manual monthly charts, you can choose whichever
scale you please. But most technical chart followers prefer to buy their long-range pictures
readymade, thereby getting a much more extensive history of many more issues than
they could hope to chart themselves. Since the only comprehensive portfolios of monthly
charts that are available at reasonable cost are arithmetically scaled, you will possibly
have to make these serve all purposes. (EN: No longer necessary because of the availability of
good software and internet chart sites. See Appendix B, Resources.) You will find with a little
experimentation that an architect’s French curve can be used to plot good Major Uptrend
Lines on many of the issues whose normal Bull Trends accelerate away from a straight line.
WESTINGHOUSE ELECTRIC WX
192
176
160
152
144
136
128
120
112
104
96
88
80
76
72
68
64
60
56
52
48
44
Sales
100’s
500400
300
200
100
ND JS FO ND JF MMMAJ JA SO ND JFJJ ASOJA M MA M A
1935 1936 1937 1938
Figure 15.15 In the process of “pulling back” to a very steep Up Trendline, prices may easily go to
a new high. Note the Pullback of August 1936 in this weekly chart of Westinghouse Electric. The
second, less steep line turned out to be the true Major Bull Trend. Note that the February–April price
pattern in 1936 could not be considered a true Double Top Reversal of Primary import because the
recession between the two highs was only about 10% of the Top’s value (around 122). Figure 8.21
shows on a daily chart the final Top Reversal Formation that “WX” made in 1937 .
238 Technical Analysis of Stock Trends
DOW – JONES
INDUSTRIAL AVERAGE
A
B
C
D
E
F
G
H
400
360
320
280
240
200
160
120
80
40
1924 1925 1926 1927 1928 1929 19301 9311 9321 9331 9341 9351 9361 937
Figure 15.16 The 1929–1932 Primary Bear Market was the only one in all stock market records that
produced a Straight-Line Major Downtrend. Trace also the Support and Resistance Levels throughout
this 14-year history of the Dow Industrials. Each rally in the great Bear Move stopped at or near a
previous Bottom level. Each decline stopped near the level of a Congestion in the 1924–1929 Bull
Market. See also the level of 1937 Top. (Source: Chart courtesy of Market Research, Inc., at h t t p : //
wwwbarchart.com .)
239Chapter fifteen: Major Trendl ines
SPX LAST-Daily
Created with TradeStation www.TradeStation.com
339.99
329.99
319.99
309.99
299.99
289.99
279.99
269.99
259.99
249.99
239.99
229.99
219.99
3/1986 4/1986 5/1986 6/1986 7/1986 8/1986 9/1986 10/19861 1/1986 7/1987 8/19879 /19871 0/1987 11/19871 2/198712/19862 /198787 3/1987 4/1987 5/198


sy of Market Research, Inc., at h t t p : //
wwwbarchart.com .)
239Chapter fifteen: Major Trendl ines
SPX LAST-Daily
Created with TradeStation www.TradeStation.com
339.99
329.99
319.99
309.99
299.99
289.99
279.99
269.99
259.99
249.99
239.99
229.99
219.99
3/1986 4/1986 5/1986 6/1986 7/1986 8/1986 9/1986 10/19861 1/1986 7/1987 8/19879 /19871 0/1987 11/19871 2/198712/19862 /198787 3/1987 4/1987 5/1987 6/1987
Figure 15.17 S&P Reagan Crash. As can be clearly seen, this crash sent numerous signals, starting
with the breaking of a Major Trendline by more than 2% in late August. Once this occurs extreme
caution and watchfulness must be exercised. The darker and darker complexion of things is brought
out by the “smart selling,” which shows many “downthrust days” toward the end (October 10–20).
The April trendline breaks (by more than 2%) would have ejected the trend trader also to be put back
long in June. Observance of the 2%–3% trendline-break rule or use of Basing Points and progressive
stops (see Chapters 27 and 28) would have avoided much needless grief.
SPX LAST-Monthly 02/29/2000 C = 1366.42 O = 1357.56 H = 1369.63 L = 1356.05 V =1181488000
Created with TradeStation www.TradeStation. com 1400.00
1200.00
1000.00
800.00
600.00
400.00
200.00
1965 1970 1975 1980 1985 1990 1995
Figure 15.18 S&P Long-Term Perspective. Viewed from afar it seems an exercise in futility to attempt
to “time the market.” One must keep in perspective the crashes in market prices are timed to coincide
with personal and business needs for short-term liquidity, or cash. One must also remember the market
behavior from 1965–1982, as well as the table of Dow Theory Performance from Chapter 4 (Table 4.2).
240 Technical Analysis of Stock Trends
2700
2600
2500
2400
2300
2200
2100
2000
1900
1800
1700
5/1987 6/1987 7/1987 8/1987 9/1987
$INDUA LAST-Daily 10/26/1987
380
360
340
320
300
280
260
240
220
Created with TradeStation
4/1929 5/1929 6/1929 7/1929 8/1929 9/1929 10/1929
$INDUA LAST-Daily 10/31/1929
9400
9200
9000
8800
8600
8400
8200
8000
7800
7600
7400
12/1997 98 2/1998 3/1998 4/1998 5/1998 6/1998 7/1998 8/1998
www.TradeStation
$INDUA LAST-Daily 09/01/1998
Figure 15.19 Three Bull Market Tops, 1929, 1987 , 1998. Notice here that in each case the crash
occurred after the nearest important trendline had been decisively broken—usually trendlines of
approximately three months by 2% or more, and sometimes accompanied by reversal formations.
All historic tops will show evidence of attempts to resume the trend after a break of this kind. Belief
dies hard. Nonetheless, hedging or exiting on these trend breaks proves to be the best strategy over
and over again.
241Chapter fifteen: Major Tre ndlines
The tests for the technical significance of a Major Trendline are substantially the same
as those specified for Intermediate Lines in the preceding chapter. A little more leeway
must be allowed on penetrations—again, a matter of judgment—but you are dealing with
coarse data and long swings here, and what you want from your monthly charts, primarily,
is perspective on the broad picture.
One more point regarding the construction of Major Bull Trendlines: the best
lines—the most useful—are drawn, as a rule, not from the absolute low of the preceding
Bear Market but starting from the next Intermediate Bottom. The accumulation area
at the beginning of a Bull Market is usually long and drawn out in time and relatively
flat. The first trendline that can be drawn from the extreme low point may, therefore,
be too nearly horizontal to express the genuine Bull Trend that starts with the markup
phase. The several charts showing Major Trendlines that illustrate this chapter
will demonstrate this point (EN: Especially Figure 15.14 ). It applies as well to many
Intermediate Moves that start from Area Formations. Take the Head-and-Shoulders
Pattern, for example: the true Intermediate Trendline usually starts from the right
shoulder rather than from the head.
$INX - Weekly US L = 1297.28 –0.20 –0.02% B = 0.00 A = 0.00 O = 1297.71 Hi = 1298.69 Lo = 1294 .97 C = 1297.28 V = 0
1174.35
952.30
1 ,496.00
1,372.00
1,259.00
1,154.00
1,059.00
971.00
890.00
817.00
749.00
1,295.68
1998 1999 2000 2001 2002 2003 2004 2005 2006
Created with TradeStation
Figure 15.20 The Bull 1990s top in the S&P gave much clearer readings than the Dow top, with the
broken trendlines being paramount. But while the Dow flirted with the emotions of Bulls who wanted
to believe in the Dow 36,000, the S&P broke its trendlines and went south for the winter, a potentially
very long winter. This might have started off as a rounding top and then became a complex-complex
top, and you can even see traces of a Head-and-Shoulders top in it. It is the editor’s opinion we may
never see such unruly tops again in this generation. The pent-up greed, lust, and naiveté as even
the bootblacks (they still have those don’t they?) rushed to get the latest tulip bulbs. Tulips are like
century plants; they only bloom once each hundred years. A little old lady with a ruler could have
saved her portfolio here. All it takes is not believing the hype (Dow 36,000 indeed!) and making an
unemotional analysis and honoring the stops.
242 Technical Analysis of Stock Trends
Major Downtrends
From the technical analyst’s point of view, it is regrettable that few Bear Markets have
produced Major Trendlines of any practical significance on the charts of individual stocks.
A notable exception was the long Bear Market of 1929–1932, which produced magnificently
straight trendlines on the arithmetic plotting of a host of issues (as well as in the Averages,
to which we shall refer later). But it is almost impossible to find other instances in which
a Bear Trendline having any forecasting value can be drawn on either arithmetic or
semilogarithmic scale.
The normal Major Bear Market Trend is not only steeper than the normal Bull Trend
(because Bear Markets last, on the


nes on the arithmetic plotting of a host of issues (as well as in the Averages,
to which we shall refer later). But it is almost impossible to find other instances in which
a Bear Trendline having any forecasting value can be drawn on either arithmetic or
semilogarithmic scale.
The normal Major Bear Market Trend is not only steeper than the normal Bull Trend
(because Bear Markets last, on the average, only about half as long as Bull Markets), but it
is also accelerating or down-curving in its course. This feature is accentuated and, hence,
particularly difficult to project effectively on the semilogarithmic scale.
The technician cannot expect to obtain much in the net of it, help from his Major
Trendlines in determining the change from a Primary Downswing to a Primary Upswing.
This should not be taken, however, as advice to not draw trendlines on a Major Down Move,
or to disregard entirely any trendlines that may develop with some appearance of authority.
If you do not expect too much of them, they may, nevertheless, afford some useful clue as
to the way in which conditions are tending to change.
The student of stock market action who is not altogether concerned with dollars and
cents results from his researches will find Bear Market Trendlines a fascinating field of
inquiry. They do some strange things even though they fail in the practical function of
calling the actual Major Turn and go shooting off into space, they sometimes produce
curious reactions (or, at least, appear to produce what would be otherwise inexplicable
market action) when the real price trend catches up with them months or years later. But
such effects, interesting as they may be, are, in our present state of knowledge, uncertain
and unpredictable. (EN: This fact may persist into the mists of the future and be thought of like
Fermat’s Last Theorem. Our present state of knowledge in the twenty-first century is no further
advanced than it was in Magee’s time.)
We must dismiss this rather unfruitful topic with the reminder that one clue to the end
of a Primary Bear Market is afforded by the Intermediate Trendline of its final phase, which
we cited in the preceding chapter.
Major Trend Channels
Another difficulty is met when trying to draw Return Lines and construct channels for Major
Trends on an arithmetic chart. Owing to the marked tendency for prices to fluctuate in ever-
wider swings (both Intermediate and Minor) as they work upward in a Primary Bull Market,
their channel grows progressively broader. The Return Line does not run parallel to the
Basic Trendline (assuming there is a good Basic Trendline to begin with) but diverges from
it. Occasionally, a stock produces a clear-cut Major Channel Pattern, but the majority do not.
A large Rectangle base was made on this weekly chart in April, May, and June 1937 , but
observe the poor volume that accompanied the breakout and rise from that formation—an
extremely Bearish indication for the Major Trend. The “measurement” of the Rectangle was
carried out by August, but that was all.
As is usually the case, it was impossible to draw a Major Down Trendline that had
any forecasting value on this chart. The beautiful straight trendlines that appeared in the
1929–1932 Primary Bear Market led many chart students to expect similar developments in
every Bear Market, but the fact is that 1929–1932 was unique in that respect.
243Chapter fifteen: Major Tre ndlines
Semilogarithmic scaling will correct, in many cases, for the Widening Channel effect
in Bull Trends, but then we run into the opposite tendency in Primary Bear Markets, and
for that, neither type of scaling will compensate.
Trendlines in the Averages
Practically everything stated in the preceding chapter regarding Intermediate Trendline
development in individual stocks applies, as well, to the various Averages. The broad
Averages or Indexes, in fact, produce more regular trends and, in consequence, more exactly
applicable trendlines. This may be partly due to the fact most Averages are composed
of active, well-publicized, and widely owned issues whose market action individually is
“normal” in the technical sense. Another reason is the process of averaging smooths out
the vagaries of component stocks, and the result more truly reflects the deep and relatively
steady economic trends and tides.
In any event, it is a fact that such averages as the Dow–Jones Rails, Industrials, and
65-Stock Composite, The New York Times 50, and Standard & Poor’s Average of 90 stocks
(the last two named being probably the most scientifically composed to typify the entire
broad market) do propagate excellent trendlines on their charts. (EN: As the reader will
note, most of these indices are obsolete. In the modern age, the S&P 500 probably best fulfills this
function.)
The very accuracy of their trends, particularly their Intermediate Moves, permits
us to construe their trendlines more tightly. Less leeway need be allowed for doubtful
penetrations. Thus, although we ask for a 3% penetration in the case of an individual stock
of medium range, 2% is ample in the Averages to give a dependable break signal.
Experienced traders know it pays to heed the Broad Market Trend. It is still easier to
swim with the tide than against it.
EN: Trendlines in the Averages and Trading in the Averages
Numerous averages and indexes have come online since the fifth edition, including the S&P 100,
S&P 500, Russell 2000, and so on. It would be an exercise in daily journalism to attempt to list all
the indexes now available, as new ones spring up like weeds after the spring rain. This is because
the invention of a widely adopted index can be very lucrative for its creator. S&P and Dow–Jones
collect licensing fees from the “use” of their indexes by the exchanges. The constant addition of new
trading instruments requires that current lists be kept in Resources, and the reader may also consult
the Wall Street Journal, Ba


ew ones spring up like weeds after the spring rain. This is because
the invention of a widely adopted index can be very lucrative for its creator. S&P and Dow–Jones
collect licensing fees from the “use” of their indexes by the exchanges. The constant addition of new
trading instruments requires that current lists be kept in Resources, and the reader may also consult
the Wall Street Journal, Barron’s, and the Investor’s Business Daily where prices of indexes and
averages are reported. Online brokerages and financial news sites also offer up-to-the-minute lists
and quotes on virtually all trading instruments. A list and links to these sites may also be found in
Appendix B, Resources, and at http:/ /www.edwards-magee.com.
As of the turn of the century, the most important of these indexes joining the Dow are
probably the S&P 500, the S&P 100, and the NASDAQ. In fact, these are probably sufficient
for economic analysis and forecasting purposes, and certainly good trading vehicles by means
of surrogate instruments, options, and futures. Some would include the Russell 2000 in this
list. These indexes and averages have been created to fill needs not addressed adequately by the
Dow–Jones Averages.
With this proliferation of measures of the market and various parts of it, a different question
arises questioning the value of the Dow alone in indicating the Broad Market Trend. Limited
research has been done on this question; however, my opinion is the Broad Market Trend
must now be determined by examining the Dow Industrials, the S&P 500, and the NASDAQ
Composite.
244 Technical Analysis of Stock Trends
Trading the Averages in the 21st century
As pointed out in other new chapters and notes in the eighth edition, the ability to trade
the Averages instead of individual stocks is a powerful choice offered by modern markets.
The index ETFs offer ideal vehicles for investing: The DIA, SPY, QQQ and IWM give the
modern investor unparalleled flexibility and convenience. Magee was of the opinion that
the Averages offered technical smoothness often lacking in individual issues. This would
seem to be true intuitively. After all, just as a moving average smooths data, the average of
a basket of stocks should dampen price volatility. Of course, as Mandelbrot pointed out, in
a 10-sigma market storm everything sinks.
Illustrated in this chapter are several detailed cases following Magee’s suggestion of
Average trading. I attempt to demonstrate here two perspectives: one, the horror of the
immediate, what the crash and panic look like as they occur; and two, what the crash and
panic look like in retrospect. We all live in the present, except for the great billionaires who
can afford to doze through horrific Bear Markets. Bill Gates’ net worth varied by $16 billion
or $17 billion in early 2000. This would put the ordinary investor out of business.
So the ordinary investor, you and I, have to respect the great yawning Bear Market.
We must step to the sidelines and let the bear eat the foolish virgins, to borrow a Biblical
metaphor.
You will remember Magee opined that a trendline break of 2% was sufficient to cause
liquidation of longs when analyzing the Averages. In the accompanying figures, this
hypothesis is examined.
EN9: In respect to the breaking of trendlines (by 2% or 3%), I should note the breaking of a
trendline is as much a warning as a signal to act. The break, instead of a change of trend to the
reverse, may indicate a change of trend to the sideways—into a reversal or continuation pattern.
245
chapter sixteen
Technical analysis of commodity charts
(EN9: Following the practice of allowing the reader to discriminate between the work of Edwards
and Magee and that of the editor, a section on commodity trading, Chapter 16, has been added to the
ninth edition. See same.)
A little thought suggests the variously interesting and significant patterns we have
examined in the foregoing chapters on stock charts should logically appear as well in the
charts of any other equities and commodities that are freely, constantly, and actively bought
and sold on organized public exchanges. In general, this is true. The price trends of anything
for which market value is determined solely (or for all practical purposes within very wide
limits) by the free interplay of supply and demand will, when graphically projected, show
the same pictorial phenomena of rise and fall, accumulation and distribution, congestion,
consolidation, and reversal that we have seen in stock market trends. Speculative aims and
speculators’ psychology are the same whether the goods dealt in are corporate shares or
contracts for the future delivery of cotton bales. (For illustrations in this chapter, see Figures
16.1 through 16.13.)
It should be possible in theory, therefore, to apply our principles of technical analysis
to any of the active commodity futures (wheat, corn, oats, cotton, cocoa, hides, eggs, etc.)
for which accurate daily price and volume data are published. It should be, that is, if proper
allowance is made for the intrinsic differences between commodity futures contracts and
stocks and bonds.
In previous editions of this book (EN9: up to the eighth), traders who cast longing eyes
on the big, quick profits apparently available in wheat, for example, were warned that
commodity charts were “of very little help,” as of 1947 .
It was pointed out that successful technical analysis of commodity futures charts had
been possible up to about 1941 or 1942, but the domination of these markets thereafter by
government regulations, loans, and purchases completely subject to the changing (and
often conflicting) policies and acts of the several governmental agencies concerned with
grains and other commodities had seriously distorted the normal evaluative machinery of
the market. At that time, radical reversals of trend could and did happen overnight without
any warning so far as the action of the m