nt number ofindividual issues at any one time to produce a counterpart in the Averages.
The technical interpretation of gaps in Averages is, in the main, the same as in singlestocks. The authors have not found that an Average gap possesses any peculiar potencyor significance over and above that attributable to a gap in the chart of any actively andclosely traded single issue.
The broader, and hence, most representative market indexes show the fewest andsmallest gaps. EN: On the other hand, the NASDAQ is quite volatile and a good gapproducer.
It is suggested the reader review this chapter after he has finished studying theprinciples of Support and Resistance in Chapter 13. (EN9: The truth is there is nothingmore that need be said about gaps, and the truth also is that no modern examples needbe added. But gaps are fun, so see Figure 11.11 and Chapter 16 for modern examples.)
Taylor & Francis
Taylor & Francis Group
http://taylorandfrancis.com
chapter thirteen
Support and Resistance
As illustrated by Figures 13.1 through 13.12, the phenomena we shall study in this chapter aremarkedly different in kind from those discussed in preceding sections. We shall look at the stockmarket from a new angle and, in so doing, may find it possible to develop some very practicaladditional rules to guide us in selecting stocks for purchase or sale, in estimating their potentialmoves, and in foreseeing where they are likely to “run into trouble.” As a matter of fact, someexperienced traders have built their “systems” almost entirely on the principles of what we callSupport and Resistance, paying no attention to the specific pictorial patterns of price and volumeaction we have been investigating in preceding pages.
Support and Resistance phenomena are not, by any means, unrelated to the various patterns andformations previously studied. We have already had occasion to hint at a basic principle of Supportand Resistance in our explanation of gaps, and, as you read on, you will find a number of the otherpatterns of price behavior are explained thereby, or at least become more readily understood.
The term Support is commonly used in the Street. In one or more of its connotations, it must befairly familiar to the reader. For example, we may hear such-and-such a crowd is supporting XYZ at50 or is prepared to support the market by buying all stock offered on any 5-point concession. Forthe purposes of this chapter, we may define Support as buying, actual or potential, sufficient involume to halt a downtrend in prices for an appreciable period. Resistance is the antithesis ofSupport; it is selling, actual or potential, sufficient in volume to satisfy all bids and, hence, stopprices from going higher for a time. Support and Resistance, as thus defined, are nearly but not quitesynonymous with demand and supply, respectively.
A Support Level is a price level at which sufficient demand for a stock appears to hold a downtrendtemporarily at least, and possibly reverse it, that is, start prices moving up again. A Resistance Zone,by the same token, is a price level at which sufficient supply of a stock is forthcoming to stop, andpossibly turn back, its uptrend. There is, theoretically, a certain amount of supply and a certainamount of demand at any given price level. (The relative amount of each will vary according tocircumstances and determine the trend.) But a Support Range represents a concentration of demand,and a Resistance Range represents a concentration of supply.
According to the foregoing definitions, you can see the top boundary of a Horizontal CongestionPattern such as a Rectangle is a Resistance Level, and its bottom edge is a Support Level; the topline of an Ascending Triangle is unmistakably a Resistance Level, and so on. But we are moreinterested now in the reasons why Support or Resistance, as the case may be, can be anticipated toappear at certain price ranges. Within reasonable limits, and with a certain few exceptions to beexamined later, it is quite possible to do this. Expert chart readers are frequently able to make someamazingly accurate predictions as to where an advance will encounter Resistance (supply) or wherea declining trend will meet Support.
The basis for such predictions—the elementary data from which Support and Resistance theories arederived—is that turnover in any given issue tends to be concentrated at the several price levels atwhich a large number of shares changed hands in times past. Since any level at which a greatvolume of transactions takes place usually becomes a Reversal point (Major, Intermediate, or Minor)in that stock's trend, it follows naturally that Reversal Levels tend to “repeat.” However, here is theinteresting and the important fact that, curiously enough, many casual chart observers appear never
to grasp: these critical price levels constantly switch their roles from Support to Resistance and fromResistance to Support. A former Top, once it has been surpassed, becomes a Bottom zone in asubsequent downtrend; and an old Bottom, once it has been penetrated, becomes a Top zone in alater advancing phase.
Normal trend development
Perhaps we can make this plainer by citing a typical example of normal trend development. Supposea stock in a Bull Trend moves up from 12 to 24, and there runs into a large volume of selling. Theresult is a reaction that may take the form of a full Intermediate Correction to, say, 18, or a series ofMinor Fluctuations forming a Consolidation Pattern between, say, 24 and 21, the effect being thesame in either case. Following this Correction or Consolidation, a new advance gets under way andcarries the price on up to 30 before running again into supply in sufficient concentration to stifle themove. Now another reaction is evidently due. Again, it may take the form of a sidewaysConsolidation Pattern or an Intermediate Correction. If the latter, where will that corrective setbackbe reversed, or in other words, will it meet Support? The answer is at 24, the


new advance gets under way andcarries the price on up to 30 before running again into supply in sufficient concentration to stifle themove. Now another reaction is evidently due. Again, it may take the form of a sidewaysConsolidation Pattern or an Intermediate Correction. If the latter, where will that corrective setbackbe reversed, or in other words, will it meet Support? The answer is at 24, the level of the first Top inthe trend. That is the level (below current quotations) where a large turnover had previouslyoccurred. Then it functioned as Resistance, producing a halt or Reversal in the first upswing; now itfunctions as Support, stemming and reversing, at least in a Minor sense, the latest downswing.
Why should this be? It will be easier to suggest an answer to that question if we first go on with asimilar example of typical action in a downtrend. This time, suppose our stock makes a Major Topand declines from, say, 70 to 50. There, at 50, a temporary Selling Climax occurs; there is a largeturnover, prices rally, perhaps slip back for a “test” of 50, and then stage a good recovery to 60. At60, buying peters out, the trend rounds over, turns down, and accelerates in renewed decline, whichcarries to a new low at 42. Again, a wave of buying comes in and a second recovery swing getsunder way. We can confidently expect this recovery (from 42) will run into strong Resistance at 50.The price level that functioned as a Support for the first phase of decline, now that it has beenbroken through the downside by the second phase, will reverse its role and function as Resistance tothe second recovery move. The former Bottom level will now become a Top level.
Here, we may ask again why this should be so, and now we can suggest an answer. In the exampleof downtrend action cited in the preceding paragraph, our stock first dropped to 50, ran intoconsiderable volume there, reversed its trend, and rallied to 60 with activity dwindling on the rise. Alot of shares changed hands at 50, and for every seller there was a buyer. A few of those buyers mayhave been covering short positions and, having done so, had no further interest in the issue. Othershort-term traders and professionals may have purchased simply because they sensed a temporaryBottom in the making and hoped to scalp a few points on the ensuing rally; presumably, they (or atleast some of them) took their profits and were out before prices broke very far on the next decline.But a majority of those who acquired shares at 50, it is safe to say, did so because they thought thestock was cheap at that price, figuring it had gone low enough. Only a few months ago, it was sellingabove 70; surely, it was a bargain at 50 and could be picked up and put away “for the long term.”
The explanation
Imagine yourself, for the moment, in the place of those new owners. They see prices turn up, reach55, 58, 60; their judgment appears to have been vindicated. They hang on until the rally peters outand prices start to drift off again, slipping to 57, 55, 52, and finally 50. They are mildly concernedbut still convinced the stock is a bargain at that price. Most likely, there is momentary hesitation in
the decline at 50 and then prices break on down. Briefly, there is hope the break is only a shakeout tobe recovered quickly, but that hope vanishes as the downtrend continues. Now our new ownersbegin to worry. Something has gone wrong. When the stock gets down below 45, the former bargaindoes not look so good. “Well, I guess I picked a lemon that time, but I won't take a loss in it. I'll justwait until it gets back up to 50 some day where I can get out even (except for expenses), and thenthey can have it.” (Does this sound familiar, by any chance?)
We can skip over the next few swings that “followed the rules” and go on to the change in thepicture, which came with the first notable violation of a Support Level in 1946. Prices had pushed upthe first of February nearly to 54, well out above the Tops around 46, which formed the previousNovember. The late-February reaction should have “caught Support”
I 1944 I 1945 I 1946 I 1947 !
Figure 13.1 Why now was so much time spent and "work" done during mid-1945 under 33-34? Wecannot see it on this chart, but the previous monthly history shows that the Bottoms of longCongestion Areas were made in this zone in late 1939 and late 1940. These old Bottoms,representing Support, originally, were able to produce some supply (Resistance) five years later.Once prices had worked through that supply, however, they were able to rise quickly to 44, and thentheir subsequent reaction found Support just where you might have expected—at 33-34. Support hadturned to Resistance and then to Support again.
around 46—but it did not; it crashed on down to the “round figure” 40. This was an ominous(although not necessarily “fatal”) development. Thereafter, a massive Symmetrical Triangle was
formed and broke downside in September.
The first Panic Decline in the Bear Market is no respecter of Support Levels. This one was noexception, although it is noteworthy that prices “bounced” several times from the important old 33-34 zone. By November, the Top Triangle's measurement had been exactly fulfilled. (You should turnback to this record and study it again after you have read further in this chapter.)
Take the opposite side of the picture—the uptrend process. You, along with many others, boughtXYZ at 12, carried it up to 24, decided that was plenty high for it, and cashed in. Thereupon XYZreacted to 20, and you congratulate yourself on your astuteness. But then, unexpectedly, it turnsaround and rushes up to 30. Now you do not feel as smart knowing that was a better stock than yougave it credit for being. You wish you had it back, yet you will not pay more for it; if it comes backdown to 24, the price at which you sold, you'll “reinstate your position.”
Perhaps you have never been in either of these situations. Perhaps your own reactions would not, insuch cases,

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ctedly, it turnsaround and rushes up to 30. Now you do not feel as smart knowing that was a better stock than yougave it credit for being. You wish you had it back, yet you will not pay more for it; if it comes backdown to 24, the price at which you sold, you'll “reinstate your position.”
Perhaps you have never been in either of these situations. Perhaps your own reactions would not, insuch cases, have been the same as those we have indicated. If you have had a fair amount ofexperience in the market—have some knowledge of the psychology of the “average investor”—youknow the pictures described are typical.
At this point, you may not be satisfied we have succeeded in giving an adequate explanation for ourbasic principle of Support and Resistance Levels. Remember, however, that the supply and demandbalance in the market is nearly always a delicate thing. Only a moderate oversupply at any one pricewill suffice to stifle an advance; only a little extra demand concentrated at a certain level will stem adecline. Remember, other traders are watching the tape as well and will be quick to sense anychange in the situation and be quick to join the parade whenever a change in trend appears to bedeveloping. Consequently, orders to buy or sell a few hundred shares may induce the transfer ofseveral thousand.
Another point worth bearing in mind is that the traders and investors who (because of thepresumption their previous mistakes in either selling or buying prematurely) created Support andResistance Levels are not necessarily ignorant or inexperienced. On the contrary, we must list themamong the wiser and more alert of those who operate in the market. To make one more use of ourprevious theoretical example of typical downtrend action, those who bought at 50 were certainlysmarter than those who bought at the top (70) or on the way down to 50, even though the latter pricewas broken later on. Giving them credit for somewhat superior judgment, it follows that they may beexpected to appraise later developments pretty carefully and display something better than a woodenand stubborn determination to “get out even” when it comes to selling on a Recovery Move. Hence,in a marked Bear Trend “overhanging supply”; that is, stock bought at higher levels by holders nowwaiting for a good chance to unload, will begin to come on the market below the theoreticalResistance Level. Wise owners will be willing to sacrifice a point or so to avoid getting caught in aworse loss.
By the same token, “sold-out Bulls,” when a Major Uptrend is under way, may be willing to pay apoint or two more to replace the shares they had previously cashed in too soon. Thus, it ischaracteristic of reactions in well-established (second phase) Bull Markets to drop back only to thevery uppermost limits of a Support Range—and for recoveries in established Bear Markets to reachonly the lowest edges of Resistance Zones, or perhaps even fail of that by an appreciable margin. Weshall have more of this sort of thing to point out later on, but first we must take up two other matters—how to estimate the potential importance of Support and Resistance Zones, and how to moreaccurately locate the centers of axes of such zones.
Estimating Support-Resistance potential
To go back to first principles, the Resistance that an upward move may meet at any given leveldepends on the quantity of stock overhanging there—the number of shares previously bought at thatprice by owners who now would like to get out without loss. Obviously then, volume is our firstcriterion in estimating the power of a Resistance Range. An old Minor Bottom level, at which onlyfour or five hundred shares changed hands, cannot set up much Resistance to a subsequent advance,but a Selling Climax Bottom, where several thousand shares were bought, will provide a lot ofpotential supply after prices have dropped well below it, at some later date, and then attempt to riseup through it again.
A long Rectangle or a Descending Triangle has a number of Bottoms at the same level. We can get acrude approximation of the amount of Resistance there by summing up the volume of trading on allits Bottoms, but then some discount must be taken for the shares that may have been bought at theBottom of the pattern in its early stages and then sold near the Top before it was completed. In brief,a single, sharp, high-volume Bottom offers somewhat more Resistance than a series of Bottoms withthe same volume spread out in time and with intervening rallies.
Another criterion is the extent of the subsequent decline. Or, to put it another way, how far priceswill have to climb before they encounter the old Bottom zone whose Resistance potential we areattempting to appraise. Generally speaking, the greater the distance, the greater the Resistance.Suppose PDQ sells off from 30 to 20, “churns” at that level for several days, rallies to 24, and thendrifts back down to 19. Investors who picked it up at 20 will not be greatly concerned at that stage. Ifa rally now develops from 19, there will be little or no disappointed selling at 20. Should prices dipto 18 before the rally starts, there may be some supply forthcoming at 20, but still not a formidablequantity. From 17, Resistance will become evident. In brief, prices have to break far enough belowthe price at which a trader bought his stock to convince him that he made a bad investment and,hence, that he should sell when he gets a chance to do so without too great a loss.
It is impossible to formulate any precise rule or equation to define how far a decline must proceed toset up Resistance above it. However, do not look for much supply to come out of a Bottom level inthe low-middle price ranges (20-35) unless the trend later takes quotations more than 10% under it.This 10% rule cannot be applied to very low-priced issues. A man may buy a stock at 5 and see itdrop to 4 or 3.5 with considerable equanimity despite the fact he stands a loss of 30% at the latterfigure. His “dollar” loss l


bove it. However, do not look for much supply to come out of a Bottom level inthe low-middle price ranges (20-35) unless the trend later takes quotations more than 10% under it.This 10% rule cannot be applied to very low-priced issues. A man may buy a stock at 5 and see itdrop to 4 or 3.5 with considerable equanimity despite the fact he stands a loss of 30% at the latterfigure. His “dollar” loss looks small, and he still thinks it will be easy for his stock to get back up to6 or 7; so, he is willing to wait.
Another factor enters into and reinforces the “extent of decline” criterion. If our PDQ rallies, asbefore, from 20 to 24 and then drops rapidly to 12, not only will many of the old owners at 20 bethoroughly disgusted and glad to get out at that price, given an opportunity, but the new owners at 12also will be pleased to take 20 (66 2/3% profit) and quick to do so if they detect any signs of troublethere. New buyers at 18, needless to say, would not be quite so ready to sell at 20.
A third criterion for appraising the Resistance potential at an old Bottom level is the length of timethat has elapsed since it was formed and the nature of general market developments in the interim.You will, no doubt, find it reasonable to suppose that an Intermediate Bottom formed in the earlystages of a Bear Market will offer relatively little Resistance after prices have fallen far below it,have taken perhaps the better part of a year
56
52
48
44
40
38
36
34 Sales 100's
50
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30
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Figure 13.2 Support-Resistance Levels in a long Intermediate Uptrend. The reader will need noguidance in applying the principles stated in this chapter to the Bendix weekly chart reproducedabove. Observe that when prices broke down in 1945 through a long trendline, their decline stopped,nevertheless, at the Support set up by the previous November's Top.
to make a Major base, and then have gradually climbed up to it again four or five years later. Tosome small extent, this is true. A supply only a year or two old is apt to be more effective than onethat is four or five years old, but the latter does not lose all of its potency by any means. In fact, it isoften surprising how effective the Resistance will be at a very old Bottom zone, provided it has notbeen “attacked” in the interim, and provided no changes have been made in the capitalization of thecompany that might obscure, in the mind of the owner, the original cost of his stock. Under the latterheading, we would put split-ups and large stock dividends, or even an unusually generous cash“melon.” We do not mean to imply that an investor is ever actually deceived as to the actual cost ofhis shares, no matter how they may have been split, or what dividend distribution has been made,but his disappointment (and desire to get out even) may be abated.
If, however, a Resistance Zone has once been attacked—if prices have come back up to it, hit it, andthen retreated—some of its power has obviously been removed. Some of its overhanging supply hasbeen used up in repelling the first attack. The next advance, therefore, will have less stock to absorbat that level. Here again, the volume chart may be looked to for some approximation of the amountof Resistance consumed. In any event, it is an odds-on assumption that a third attack at a ResistanceLevel will succeed in penetrating it.
We have named three criteria—volume, distance away, and time elapsed—to be used in assessingthe amount of Resistance to be expected at any given level. At this point, it must be apparent (andperhaps disappointing) to the reader that his own judgment must play a large role in applying them.This cannot be helped; it is impossible to set up an exact mathematical formula for any of them.
But, after all, the problem is not too complicated. The general principles are simple enough and, webelieve, easy to understand. We can look back at the charted history and see where, in the lastpreceding downtrend, a Bottom formed that may produce more or
30
25
20
15
10
5
Figure 13.3 For Major Support-Resistance Level study, monthly charts are most useful. This onepresents many points of interest. Observe how important levels are formed and how, once formed,they appear again, and reverse their roles. The price scale shows 1947 values with previous yearsadjusted for the splits of 1933 and 1946.
less Resistance when the current advance reaches back up to its range. We have to estimate howmuch supply resides there, how many shares were bought originally at that price and are still held byowners who may welcome a chance to get out even.
The greatest danger in applying judgment to the measuring of these factors lies in underestimatingthe amount of Resistance to be expected. Guard against that effort; it is safer always to overestimateit. You may be Bullishly disposed yourself; you may say, “Those fellows who were hung up there inthis stock must realize that conditions have improved, and they will not be so anxious now to sell.”Don't count on it. Recall, they have been “hung up” for a long time; even if they are mildly Bullishon the market in general, they may be so disappointed with this particular stock that they want toswitch out of it and try something else. (The stubborn and often costly refusal of the averageAmerican investor to “take a loss” operates even against timely switching.)
Everything we have said in the foregoing paragraphs about estimating potential Resistance appliesas well—but in a reverse direction, of course—to estimating potential Support. The principles areprecisely the same, even though the underlying rationale may be less easy to grasp.
40
30
20
10 Sales 100's
800
400
Figure 13.4 Particularly noteworthy in this monthly record is the Resistance met in 1939, 1940,1941, and even in 1944, at the Bottom level (just above 26), the three-month Congestion of 1936.Also, the appearance eight years later (!) in 1945 of Resistance at the Bottom level (28) of the High-Volume Top Congestion of 1936-1937.
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40
30
20
10 Sales 100's
800
400
Figure 13.4 Particularly noteworthy in this monthly record is the Resistance met in 1939, 1940,1941, and even in 1944, at the Bottom level (just above 26), the three-month Congestion of 1936.Also, the appearance eight years later (!) in 1945 of Resistance at the Bottom level (28) of the High-Volume Top Congestion of 1936-1937.
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Prices were able to “skyrocket” when that Resistance was finally overcome. You will find thatseveral additional Support-Resistance Lines might have been drawn on this chart. Note MajorBottom Formations of 1937-1938 and 1942.
Locating precise levels
Our next problem to consider is how, in practical day-to-day chart analysis, we can locate as exactlyas possible the limits of a Support or Resistance Range and, in many cases, the specific price figurerepresenting the core or axis of such a range. In the theoretical examples we have made up so far toillustrate basic principles, we have used even figures, but in actual trading, the levels are seldom sonicely marked. Even the sharp and relatively patternless Bottom of a Recession may consist of aweek of price fluctuations within a narrow range. Perhaps the lowest day of that week's Congestionwill appear on the chart as a One-Day Reversal, or there will be two or three days that “spike” downbelow the general mass. Here again, although no mathematical rule can be laid down, it is easy torelate the price and volume patterns visually, and by simple inspection, arrive at a near estimate ofthe figure at which supply in quantity is likely to be forthcoming. Look particularly at the closinglevels of the days making up the Bottom Congestion and average them mentally; this figure is apt tobe pretty close to the “center of gravity” of the entire Resistance Area.
Some supply is likely to start coming in as soon as a subsequent advance reaches the bottommostfraction of the Resistance Zone, and more and more will appear as the move pushes up into it.Sometimes, it is possible to predict “to a hair” just how far prices will penetrate a Resistance Rangeby carefully comparing the vigor (volume of trading) on the advance with the volume registered atvarious levels in the original formation of the Resistance. This takes experience, but it is experiencethat you will find quite easy and not at all costly to gain. In most cases, however, it is neithernecessary nor particularly desirable to be so exacting.
Nearly every chart in this book shows some example of Support and Resistance phenomena, and thereader should make it a point when he has finished this chapter to go back over and study them all indetail. The practical application of the rules we have been discussing will be greatly clarified.Equally instructive, if you can manage to obtain such a collection, is a study of the Support andResistance Levels appearing in the monthly charts of all actively traded stocks over a period of 10
years or more. EN: Easily generated by most currently available software and on the internet atstockcharts.com and other sites. You will undoubtedly be amazed to see how Tops, Bottoms, andSideways Congestions tend to form at the same approximate levels in successive Major Swings,while prices move freely and rapidly, up or down, through the ranges between such levels. It ishardly necessary to dwell on the practical dollars-and-cents value of such information that may bederived from the chart history.
This brings up a matter that we may as well pause to consider here—the kind of charts most usefulfor locating and appraising Support and Resistance Levels. For near-term Minor Moves, the dailychart is naturally the only source of information, and a daily chart record that extends back for a yearor more may, if necessary, be used in the location of levels of Intermediate Trend importance. Thewriters have found, however, that a daily chart does not give the perspective on the long range thatone really needs to determine Major and Intermediate Support and Resistance Zones. It is apt tooveremphasize the potential of a recently set up Minor Support (or Resistance) Zone and obscure theimportance of a true Intermediate Level. For true perspective, a weekly chart, showing volume aswell as price ranges, and covering at least the whole previous Major Bull and Bear cycle, is mostdesirable. Also, very good results can be obtained with a little study and experience from monthlycharts.
To return to our study of Support phenomena, we have had several occasions to refer in previouschapters to a “normal” trend. What we have had in mind might perhaps be better called an “ideal”trend because, like so many other so-called normal things, it represents a pattern from which thefacts of experience frequently deviate. In stock trends, nevertheless, this normal or ideal appears as afairly common pattern. If it is an uptrend, it consists of a series of zigzags (EN10: think waves, as inChapter 28), each “zig” carrying prices to a new high and each “zag” taking them back to theapproximate top of the preceding “zig.” To illustrate with figures, up to 10, back to 6, up to 15, backto 10, up to 20, back to 15, up to 26, back to 20, and so on. Such a move is what technicians refer toas “self-correction” and regard as particularly sound and, hence, likely to be continued. You can seeit really represents a reaction to the nearest Minor Support Level following each step forward. If youbecome in


f the preceding “zig.” To illustrate with figures, up to 10, back to 6, up to 15, backto 10, up to 20, back to 15, up to 26, back to 20, and so on. Such a move is what technicians refer toas “self-correction” and regard as particularly sound and, hence, likely to be continued. You can seeit really represents a reaction to the nearest Minor Support Level following each step forward. If youbecome interested in an issue with such a trend pattern, the normal return to a Support produces agood place to buy.
Significance of Support failure
Sooner or later, however, a normal Minor Wave Pattern is bound to be broken up. This generallyoccurs in one of two ways (although there is an infinity of possible variations). In one, prices spurtaway in an advance out of all proportion to the previous succession
Figure 13.5 A monthly chart of Jewel Tea Company with its Major Support-Resistance Levelsmarked. Note the reversal of roles.
of up waves. Such a move is seldom followed by a reaction to the Support now left far behind, butrather, by the construction of some sort of Area Pattern—which may be either Consolidation orReversal.
The other type of disruption appears when a reaction does not halt and reverse at the level of theprevious Minor Top, but sifts on down through that zone, perhaps to the level of the preceding MinorBottom. This move has “broken its Support,” and any such action carries a distinct warning of achange in trend, a particularly emphatic warning if activity shows a tendency to increase as or afterthe Support is violated. Note we said change in trend rather than Reversal because the puncturing ofa Minor Support Level may signify only a halt for sideways Consolidation, yet it may also foretokenan impending Reversal; either of these is a change.
If you will now call to mind the picture of a typical Head-and-Shoulders Top, you will see thedecline from the head constitutes just such a break in Minor Support because it comes down throughthe level of the top of the left shoulder. You will recall this decline is often the first intimation wehave that something in the nature of a Reversal Formation is developing.
Thus, even the violation of a nearby Support Level has a practical meaning in technical chartanalysis. The breaking of a Minor Support should always be regarded as the first step in the Reversalof the Intermediate Trend. (If it turns out to be Consolidation only, there will be an opportunity laterto reenter an abandoned commitment if desired.) By the same token, the breaking of an IntermediateSupport Range is frequently the first sign of a Reversal in the Major Trend. We do not believe it isnecessary to expatiate further on this principle. Recommended trading tactics based thereon arediscussed in Section II of this book; Support and Resistance Levels are particularly useful as BasingPoints for stop-loss orders, which are discussed there.
Popular misconceptions
The reader will understand all we have said here about the breaking of Supports applies as well, butin reverse direction to the penetration of Resistance Levels. One more point may well be mentionedbefore we leave this subject; if you happen to have spent much time in
44
40
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34
32
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26
Sales 100's
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REMINGTON RAND
RR
..
Figure 13.6 When prices broke down out of the large Descending Triangle that formed onRemington Rand's weekly chart in 1946, the decline might have halted, at least temporarily, around37 at the level of the four-week Congestion made in April and should have “caught Support” at 35-36, the level of the February top. Failure of the latter carried Major Trend significance. Note laterResistance at 40 1/2.
boardrooms, you will have noticed the concepts of Support and Resistance prevalent there aresomewhat different from those outlined in this chapter. For example, if X has advanced to 62,reacted to 57, and then pushed on to 68, many traders will speak of 57 as being the Support Level,presumably because that was the last price at which X was supported in sufficient strength to turn itstrend from down to up. We, as you have seen, would name the vicinity of 62 as the Support Range.The distinction is important to grasp and sometimes extremely important in practical results.
Admittedly, it does not come easy to think of a former Top as denoting the level at which a laterBottom should form, or vice versa; it would seem superficially to be much more logical to relate Topto Top and Bottom to Bottom. Moreover, it is perfectly true, to use our X example again, that someof the investors who wanted to buy it at 57 might not have succeeded in getting it before the secondadvance to 68 took it away, and their buy orders might still stand at 57 or might be reentered on anyreturn to that price. Nevertheless, there is certainly no assurance that such is the case; there is no“vested interest” in X at 57 that will “automatically” bring in new buying. On the other hand, wehave seen how there is a sort of vested interest set up at an old Bottom that produces selling(Resistance), and thereby creates a new Top, and at an old Top that produces buying (Support) andthereby creates a new Bottom.
The reader is urged to keep this concept well in mind. Any analytical study of the chart records willquickly show it is much easier for prices to push up through a former Top level than through theResistance set up at a previous volume Bottom (and vice versa, of course, with respect to declines).You will find a little selling may come in at a former high, but usually only enough to cause a briefhalt rather than the more or less extensive reactions or Consolidations that develop when the trendcomes up against a real Resistance Zone.
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onsolidations that develop when the trendcomes up against a real Resistance Zone.
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Figure 13.7 York is a relatively thin stock, which normally makes many small, technicallymeaningless gaps, but its large, high-volume gap of October 8, 1945, demanded attention. It lookedlike a Runaway Gap, and as such implied continuation to 26 1/2 plus, but prices halted their advanceat 24 1/2 and went into a three-month Rectangle. An upside breakout on January 10, 1946, carriedout the minimum measurement of the Rectangle (and October gap); prices then reacted. See sequelin Figure 13.8.
The round figures
There are certain other levels that may, at times, evidently produce considerable Resistance orSupport without any reference to a previous “vested interest.” We have in mind the “round” figures20, 30, 50, 75, 100, etc. In setting a goal for taking profits when we buy a stock, it is natural for us tothink in terms of such round prices. If a low-priced stock has advanced steadily from around 10, it ispretty certain on this account to meet with profittaking sales at 20, especially if that figure representsa new high for several years. In fact, any time an issue gets out into new all-time high ground, wherethere is nothing in its chart history to indicate otherwise, it is a fairly safe bet that Resistance willappear at the round figures. In old and actively traded stocks, such as U.S. Steel (EN: or IBM andGE), the round figures diminish in importance.
Repeating historical levels
If, once they had been set up, important Support and Resistance Levels always “worked,” we shouldsee Intermediate Tops and Bottoms form at exactly the same ranges year after year in one Bull andBear cycle after another. As a matter of fact, there is a well-marked tendency for this to occur in old-line, actively traded stock. In General Electric, for example, the 22-24, 34-35, 40-42, and 48-50zones were characterized by large turnover (and, consequently, by many Intermediate Reversals oftrend) throughout the 1920s and into the 1950s. In Southern Pacific, there are historical Support andResistance Zones at 21-22, 28-30, 38-40, and 55-56. In U.S. Steel, 42-45, 55-58, 69-72, 78-80, and93-96 are conspicuously marked as Reversal
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YORK CORPORATION YOK
___ AUGUST SEPTEMBER, , '22 29 6 [13 5'027 3 l10l17l24 1 31T7 114*21 '28
r 6 13 20 27 4 11 18 25 1 8 15
Figure 13.8 The February reaction in Figure 13.7 met momentary Support at 24; prices bounced farenough to close the February 7 gap and then broke down through the Rectangle Top-Line Supporttechnically a distinct warning. Then a Symmetrical Triangle formed, but the breakout came too nearthe apex, produced only a rally to the former high, and then an “end run.” One did not need to waitfor the Double Top signal on August 22 to forecast a decline of more than minor consequence.
Ranges. Additionally, many other stocks might be cited. (EN9: While the particular stocks are deador transmogrified, the principle is alive and well.)
Over long periods, however, such Support and Resistance Levels do tend to be gradually modified,broadened, or “blurred” as new ones are created. One source of many important new Supply Zonesis a Bear Market Panic. For this is the one type of decline that can be counted on to pay no heedwhatsoever to previous underlying Support Zones. Panics (which, as seen in our earlier study ofPrimary Swings in connection with Dow Theory, typify the second phase of Bear Markets), oncethey get under way, seem to sweep away all potential Support in their calamitous plunges until theyexhaust themselves in a general market Selling Climax for which may or may not come at a levelthat bears a relation to some previously established Support. To use U.S. Steel again as an example,the 1937 Panic Decline took the stock down through its 93-96 range, hesitated briefly at the 78-80level, and then plunged through 69-72 and 55-58 to stop just above 50. In the 1946 Panic, X againbroke swiftly through 78-80 and 69-72 to halt at 66.
When there is a large turnover at a Panic Bottom in any given stock, that level acquires a strong“vested interest” for the future and will usually furnish conspicuous Resistance to a subsequentadvance (after another Bear Market Decline has taken quotations below the Panic Level).
This discussion of Panics brings us back to a consideration of Support and Resistance performanceat other stages of the Primary Trend. Bearing in mind the relation of Resistance to volume, it is easyto see why in a long drawn out but otherwise typical Bear Swing in which trading interestdiminishes to a very low ebb as the final low is approached, the next to the last Intermediate Bottommay produce relatively little supply and, consequently, only a small reaction when the new uptrendreaches its level. Add to this the fact that many of the buyers in the last stages of a Major Decline aredeliberate scale-down investors who fully expect prices will go lower and, hence, are not easilyshaken out. The slow progress so often seen in the first part of a new Primary Bull Market is due notso much to overhead Resistance as to lack of impatient public bidding.
The Recovery Trends that follow precipitous Bear Market Panics usually exhaust themselves, forobvious reasons, long before they get back up to the las


own investors who fully expect prices will go lower and, hence, are not easilyshaken out. The slow progress so often seen in the first part of a new Primary Bull Market is due notso much to overhead Resistance as to lack of impatient public bidding.
The Recovery Trends that follow precipitous Bear Market Panics usually exhaust themselves, forobvious reasons, long before they get back up to the last Resistance Level left behind in that PrimaryDownswing (which is usually the Bottom of the first Intermediate Decline from the extreme Top ofthe cycle), but they often meet supply at a lower Resistance Zone set up in the preceding BullMarket. Look way back on your charts, therefore, when sizing up the prospective advance in suchsituations.
A further thought along that line is this: there is no law that requires an advancing trend to keep righton climbing until it reaches a distant overhead Supply Zone. It is true, as a corollary that we havealready mentioned to our Support and Resistance Theory, that prices can and do rise easily through aprice range at which no Bottoms or Congestion Areas have formed in previous downtrends, but ifthe first established Resistance Level is a long way above, the advance may exhaust itself before itgets there. Heavy supply may come in for other reasons at a lower level. Think, then, of a distantResistance Level as a maximum possibility rather than as a certain goal. However, between twostocks whose purchase you are considering, you should select the one, other things being equal, withthe “thinner” track overhead and can rise farther before it encounters a charted Supply Zone.
Pattern Resistance
We can revert now to some of the Minor phenomena discussed in connection with Reversal andConsolidation Patterns in earlier chapters. Take gaps, for instance. You will now see why it is easyand, hence, quite in order for a reaction that comes soon after a gap has been made to slip back andclose that gap. There is no “vested interest” whatever in the range through which prices skipped to
form the gap on the chart. You will also see why such a reaction may stop short and reverse as soonas it has closed the gap, provided there was a high-volume turnover in the price range immediatelypreceding the gap. Such is usually the case with a Breakaway Gap.
Any gap, for the same reason, is easy to close once a reaction starts prices moving back in thatdirection, if it is not too far away and if there are no intervening Resistance Levels to stop thereaction before it gets there. In the case of a Runaway Gap, however, there is no reason why areaction should halt as soon as it has covered the gap range; on the contrary, it will probablycontinue on through the “thin” price track that preceded the gap.
Pullbacks and Throwbacks—the quick return moves that we noted as developing so often shortlyafter a breakout from a Head-and-Shoulders or other Area Pattern—exemplify the principles ofSupport and Resistance. When prices break down, for example, out of a Descending Triangle, thehorizontal lower boundary of the formation, which was originally a Demand Line, promptly reversesits role and becomes a Resistance Level. Any attempt to put prices back up through it, therefore,after a decisive breakout, is stopped by supply at or near the line. By the same token, the neckline ofa Head-and-Shoulders Top, which was a Demand Line, becomes a Resistance Level after it has beenbroken. The Top or Supply Line of a Rectangle becomes a Support after prices have pushed above iton volume and by a decisive margin.
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Figure 13.9 We first discussed Pullbacks in connection with the Head-and-Shoulders in Chapter 6and refer to them again in this chapter as Support-Resistance phenomena. At least one Pullback tothe neckline (after the breakout) occurs in the great majority of cases. Many Head-and-ShouldersFormations produce two, the first within a few days after the breakout and before prices have gottenvery far away, and the second weeks later, sometimes after the minimum measurement of the Head-and-Shoulders has been fulfilled. Goodyear saw the unusual number of four Pullbacks to its 1946neckline in the first two weeks after the August breakout, another in October, a third in November,and a fourth in February 1947, which met the Double Resistance of the neckline and the downtrendline (see Chapter 14) projected from the 1946 April head and August right shoulder.
Earlier in this chapter, in our discussion of the three criteria for appraising the amount of Resistanceto be expected at a former Bottom level, we named “distance away” as one of the criteria and statedas a general rule that prices should have gone at least 10% beyond that level in a medium-pricedstock before much Resistance would be set up. This 10%-away rule does not apply in the case of aThrowback to a well-defined area formation when it follows shortly after a breakout. All that isnecessary to establish strong Resistance to such moves at the pattern boundary is a conclusivebreakout.
The Symmetrical Triangle has a different sort of Support and Resistance “field.” You will recall thatthe first Reversal point in the formation of a Symmetrical Triangle (a Top, if it forms on a risingtrend, or a Bottom if on a decline) is normally accompanied by high trading volume, but that activitydiminishes rapidly on succeeding fluctuations within its converging boundaries. Consequently, onceprices have broken out of the Triangle and have proceeded well beyond the level of the pattern's firstReversal point, that level, because of the volume of shares traded there, becomes a Support (orResistance) against a subsequent reaction. But, if the breakout move does not carry beyond theTriangle's first Reversal Level by a clear margin, any Throwback will probably bring quotationsback to the extended (sloping) pattern boundary. If the reaction does not occur unt


the level of the pattern's firstReversal point, that level, because of the volume of shares traded there, becomes a Support (orResistance) against a subsequent reaction. But, if the breakout move does not carry beyond theTriangle's first Reversal Level by a clear margin, any Throwback will probably bring quotationsback to the extended (sloping) pattern boundary. If the reaction does not occur until the trend hasworked out to or beyond the Triangle's apex, then the Throwback usually will not meet Support (or
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IT
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Figure 13.10 Several examples of the Support “field” of the Symmetrical Triangle appear in this1945 daily chart of “IT.” Following the belated February 5 breakout from the first Triangle, pricesreturned on the 9th to the level of the mid-January Top, but then suffered a more extensive reaction,which came down on February 26 to the Triangle's apex level. This was a critical juncture. The apexpoint itself is a strong Support (or Resistance), but its level becomes weaker as time passes. In thiscase an “end run” might have been developing. Stop-loss orders should always be entered under anapex level (see Chapter 27). Here the apex held, however, and prices went into another “Coil,”breaking out topside on March 10. Their next reaction was supported, as was to be expected after an
early breakout like this, at the Top Pattern Line. The price track from mid-March to the end of Aprilfell into an Ascending Triangle Pattern, the top boundary of which functioned as Support in June butwas broken in July. Refer to Figure 11.17.
Figure 13.11 In this instance, a belated upside breakout (August 10) from a Symmetrical Trianglefailed quickly and the subsequent reaction, after holding for several days at the apex level, finallybroke down for an “end run.” Thereafter, note the apex level turned into a Resistance againstRecovery Moves.
Resistance) until it has carried back to the level of the apex, which, in brief, represents theconcentration level or axis of the Triangle's Support and Resistance.
The intersection of the two converging boundary lines of a Symmetrical Triangle has sometimesbeen called a “cradle.” The axis Support (or Resistance) is strongest near the cradle point and getsweaker 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 thenpeters out, flattens, and begins to react after the cradle point has been passed in terms of time, itsaction, as it reaches the axis line, must be closely watched. (A stop-loss order may be indicatedhere.) Should the axis Support fail to hold, the reaction may plunge through and accelerate in a moreextensive 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, butperhaps after holding there for several days, push on through, there is nearly always a suddenacceleration and a marked pickup in volume. This may be taken as confirmatory evidence of adecisive break and, consequently, an indication the move will carry on. The reasons for this volumeincrease are obscure. Some say, “It takes volume to overcome
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Figure 13.12 Here is a typical case of two Pullbacks to a Head-and-Shoulders neckline, the firstimmediately 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 generalApril-May Congestion Area. However, what this chart particularly illustrates is how volumeincreases when a good Support Range is penetrated. Note the decided pickup on August 27, whenthe April-May area was left behind.
Resistance,” which is true enough, but the volume usually comes after the Resistance has beenpenetrated. Therefore, others say, “The volume is evidence that technicians see what has happenedand are now jumping in.” But that line of thought, in the authors' opinions, also has little tosubstantiate it. (We shall have more to say about the questionable influence of technicians on thetrend later on.) Many of the arguments over volume change versus price change smack of the oldhen-or-egg riddle. In any event, causes for many technical phenomena, such as this one, may be leftto 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 principlesof 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 thatSupport and Resistance Zones in the Averages cannot be as sharply and narrowly construed. MinorTops and Bottoms in the Averages, particularly, are less dependable as Resistance Levels. Clearlydefined and important Intermediate Reversals, however, as they nearly always represent Reversals inthe entire market (practically all stocks), will normally produce strong Resistance (or Support, as thecase may be) in the subsequent Average Trend.
When the Averages break down through a Support Level, but simultaneously one or more stockshold firm at or above their corresponding individual Supports, there is a presumption that thoseparticular 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 qualifica


in the subsequent Average Trend.
When the Averages break down through a Support Level, but simultaneously one or more stockshold firm at or above their corresponding individual Supports, there is a presumption that thoseparticular 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 presumptionthat must be considered. For instance, it may be that the stock that has resisted decline will, for thatvery reason, be less attractive to new buyers than one that broke drastically and is now purchasableat 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 permitargument either way. It is safest to treat all such relative performance indications as only one minorfactor to be appraised in the overall chart picture.
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 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
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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.
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-m


, 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.”
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.
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 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
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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.
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 st


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
32
30
28
26
24
22
20 Sales 100's 250 200 150 100
50
COMMERCIAL SOLVENTS
CV
1946
MAY
‘JANUARY- ,
' 5 12 19 26 2 9 16 23 2 9 16 23 30 6 13 20 27 4 11 18 25 1
JUNE
8 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.
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
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
20
19
18
17 Sales 100's
- —
ii iln i n>
PHILLIPS PETROLEUM P
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. 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. (In


e 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.)
40 Sales 100s
125
100
75
50
25
PX
PARAMOUNT PICTURES
1945-1946
Jllll llllfllll
—MARCH
Biu_____
OCTOBER NOVEMBER DECEMBER JANUARY FEBRUARY ....._____
6 13 20 27 3 10 17 24 1 8 15 22 29 5 12 19 26 2V9 16 23 2 9 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.
96
88
80
76 Sales 100's
125
100
75
50
25
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.)
14
Sales 100's
500
400
300
200
100
MARCH
’JUNE
S
PN
APRIL
M11M "DECEMBER •
24 1-8 15 22 29
JANUAR^FEBRUAR^
5 12 19 26 2 9 16 23
AUGUST SEPTEMBER ’
10 17 24 31 7 14 21 28 5 ’
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.
1 7 14 21 28 5 12 19 26 2 9 16 23 30 7 • 14 21 28 4 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.
34
32
30
28
26 Sales

26
24
22
20
19
18
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.
Sales
Figure 14.11 Six months of an Uptrend Channel that actually started to
form in December 1943. It was broken downside in August 1945.
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
24
22
20
19
18
17
16 Sales 100's 125 100
75
50
25
NASH - KELVINATOR
NK
1946 g
JULY
AUGUST SEPTEMBER
ApRIL MAY, , , JUNE , ,
6 13 20 27 4 11 18 25 1 8 15 22 29" 6 13 20 27 3 10 17 24' 317 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.
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.
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


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.
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.
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 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.
ARKANSAS BEST
34
30
32
25
20
15
28
10
26
85
I—
>80'81',82:83 84
8687
24 -
22
20
19
18
17
16
15
14
13
12
11
Sales 100's
JANUARY Fl
ARKANSAS BEST'
F1 tati
EBRUARY MARC
11412128 7 1141211
AUGUST
7 114'21128 4
XD.09
XD.09
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.
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.)
38
36
34
32
30 Sales 100's 125 100
75
50
25
56
52
48
44
40
38
36 Sales 100's
50
40
30
20
10
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
JULY ' AUGUST SEPTEMBER ’OCTOBER NOVEMBER DECEMBER
8 15 22 29 5 12 19 26 2 9 16 23 30 7 14 21 28^4 11 18 25 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.
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


vember 21. The mid-September to November price
pattern looked at first like a Descending Triangle, but volume began to rise
in October.
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
30
28
26
24
22
BUCYRUS ERIE CO.
1984
20
19
18
17
16
15
14
13
12
F.
11
Sales ~
100's
1000
800
600
400
200
M ARCH APRIL MAY IUNE IUL Y AUGUST SEPTEMBER O CTOBER
N OVEMBER DECEMBER ~
17 24 31 7 14 21 28 5 12 19 26 2 9 16 23 301 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.
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
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
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,
(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 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


ll-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 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.
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