Drawing Conclusions on Trend Lines

I trade a lot of trend line breaks, but not all of them are equal.

Especially right now in what has been a pretty lethargic tape of late. Take for example the S&P 500, which has edged higher by roughly 1% since making an all-time high through 2093 less than 2 weeks ago.

Don’t get me wrong, this market isn’t weak, but 1%? In 2 weeks? After breaking out from a multi-month trading range? Hardly what I’d define as momentum.

Back to the trend line conversation though, I don’t treat them all alike. Discussing part of this yesterday with a fellow Bandit, I got to thinking about it and wanted to share a few thoughts.

The question I was asked revolved around descending trend lines in the current environment, and the fact that many stocks have been able to clear their respective descending trend lines but not power higher.

So, here are 3 situations where I’m currently giving trend line breaks a bit more validity:

Steep Descending Trend Lines. Generally, a steep trend line is indicative of some serious pressure on the stock, so once that is alleviated, it tends to spike a little better. Imagine being held underwater for a short time, then being set free to surface. You’d pop up quick if given the chance. In a quieter tape, favor these kinds of plays for short-term lifts.

steep_DTL

Momentum Before the Trend Line. By this, I mean I like when the stock has exhibited some nice momentum prior to the trend line forming, whether that trend line is lateral or descending. It’s a bigger-than-normal move ahead of the rest phase. I’ve noticed that those stocks tend to find better follow through once they get back on the move, as traders identify them as recent runners and don’t quickly cross them off their watch lists.

momentum_TL

Rhythmic Trend Line Breaks. A stock that has been moving in a recent rhythm is going to need something to interrupt that rhythm in order to stop. So unless that interruption has taken place, I expect more of the same. Look for similarly-sized rally phases, as well as rest phases of similar duration (___ days). Once the newest trend line gets crossed, it tends to find some traction.

rhythm_TL

Trade Like a Bandit!

Jeff White