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D. Inside Formation

C. Outside Formation

B. Bear Formation

A. Bull Formation

Higher high and higher low from preceding formation

Lower low and lower high from preceding formation

Higher high and lower low from preceding formation

Lower high and higher low from preceding formation

Trends tend to be series of Bull Formations (uptrend) and Bear Formations (downtrend).

Consolidations tend to be combinations of Inside and Outside formations.

The famous Head and Shoulders Top and Bottom is actually two sequential [sɪ'kwen(t)ʃ(ə)l] Bull (or Bear) Formations followed by a Bear (or Bull) Formation.

In fact all conventional bar chart formations can be reduced to a Pugh series.

I keep a running notation of Pugh formations and look for patterns in the series.

You may use 1, 2, 3, 4 for the four formations. I use “1” for a Bull, “0” for

a Bear, “11” for an Outside, and “00” for an Inside. A vertical line “|” is used to separate them. You might also use brackets “[ ].”

A notation might look like this:

1|1|0|1|0|00|11|1|1|1|0

3. Trendlines: Support and Resistance

Technical analysis is built on the assumption that prices trend. A trend can be up, down, or lateral ['læt(ə)r(ə)l] and is represented by drawing a straight line above the daily highs in a downward ['daunwəd] trend and a straight line below the daily lows in an upward trend (See Slide 12):

In other words, a trendline is a straight line that connects two or more price points and then extends into the future to act as a line of support or resistance.

Uptrend lines act as support (See Slide 13). As long as closing prices remain above the trendline, the uptrend is intact [ɪn'tækt] (неушкоджена).

A downtrend line (See Slide 13) has a negative slope [sləup] (нахил) and is formed by connecting two or more high points. Downtrend lines act as resistance. As long as closing prices remain below the downtrend line, we consider the downtrend intact.

A common trading technique involves the intersection[ˌɪntə'sekʃ(ə)n]of the trendline with the most recent['riːs(ə)nt]close price.

If the trendline for a downward trend crosses through the most recent close price, a buy signal is generated.

Conversely ['kɔnvɜːslɪ], if the trendline for an upward trend passes through the most recent close price, then a sell signal is generated.

One or more big up or down bars at a reversal point (See Slide 14) may be the reason that it is difficult to draw a new trendline from the highest or lowest point:

Looking at different charts and periods (See Slide 15) we noticed that from the start of a new price move, the trend shows three possible scenarios [sɪ'nɑːrɪəu] before reaching the end of that trend:

1) No change: the price continues to move along the trendline until it breaks the trendline.

2) The price accelerates and moves far away from the trendline; you need to draw a new, steeper trendline.

3) The price decelerates and breaks the trend moderately ['mɔd(ə)rətlɪ] and continues, temporarily, less steep or even flat.

Of course in some longer term price moves you will find all three possibilities combined in one trend.

Sometimes it may seem difficult to start drawing a normal trendline. In Slide 16, the one of the move starts with a sharp trendline up. Next, the prices slow down for a short time; then subsequently continue with high acceleration. In such a scenario, it is difficult to draw a trendline or price channel that would help to estimate future price targets.

This is where the inverse trendline comes in handy. The last price high in September and a previous end of July high are good reference points for drawing the inverse thick trendline.

In an ascending trend, the inverse trendline is drawn from price tops. In a descending trend, the inverse trendline is drawn from price bottoms.

From the lowest bottom in August, you now can draw a parallel line with the inverse trendline, creating the other side of what probably will become a future price channel. Slide 16shows the further price evolution perfectly in line with the trend channel created on the base of the inverse trendline.

Sometimes you will see a normal downtrend line and an inverse trendline that have different slopes (See Slide 17):

 

As you can see in Slide 17, the prices touch both the inverse trendline and the parallel line. The parallel line with the inverse trendline from the start of the downtrend forms a multi-reversal line that alternates [ɔːl'tɜːnət] between resistance and support. It also looks as if the downtrend channel is widening.

Looking at the further price development, it is funny to see how each of the trendlines does the job. The inverse trendline gives support, just like the multi-reversal line does, while the normal downtrend line is now resisting.

The inverse trendline is a good tool to find medium and longer term trends when it is not possible to draw a normal trendline in the early stage of a new trend development.

 

Another special trendline is centreline. Centreline is drawn between a bottom pivot ['pɪvət] point and a top pivot point or visa versa. This kind of trendline can be used as a reference for action-reaction lines (See Slide 18):

In Slide 18, a parallel line with the centreline through a previous high or low point is the action reference. Preferably, the action line and the price data should show a similar slope.

From here on, you can create a second parallel line; this is the reaction line projected into the future. The distance from the centerline is equal to the distance between the centerline and the action line.

Note how the prices turn at the reaction line and how they start moving up again with about the same slope as the original top-bottom centerline.

 


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