August 30, 2011 – Sharpening the Mind #4 – Significance of Support and Angles

Reference: Martin Pring, Technical Analysis Explained (2nd Edition). page 146

# of Times the Trendline has been touched or Approached:

A trendline derives its authority from the number of times it has been touched or approached; that is, the larger the number, the greater the significance.  This is true because a trendline represents a dynamic area of support or resistance.  Each successive “test” of the line contributes to the importance of this support or resistance role, and thus the authority of the line is a true reflection of the underlying trend.  Just remember, that a close encounter with the line (an approach) is almost as important as an actual touching of the line because it still reflects the line’s importance as a support or resistance area.  

Also, if a line gains significance from the fact that it has been touched or approached, the extended line will become equally as important, but from a reverse point of view, sinc extended lines reverse their support/ resistance functions.

Angle of Ascent or Descent

A very sharp trend is difficult to maintain and is liable to be broken rather easily, even by a short sideways movement.  All trends are eventually violated, but the steeper ones are likely to be ruptured more quickly.  

The violation of a particularly steep trend is not as significant as that of a more gradual one.  The penetration of a steep line usually results in a short corrective movement, following which the trend resumes, but at a greatly reduced and more sustainable pace.  Usually the penetration of a steep trendline represents a continuation rather than a reversal break.

*Personal Comments:

I shall not name any specific high rising, steep angled stock, but reading this article reminds me that despite the positive loop from the US equity markets, a corrective movement is more likely to ensue rather than a continuation of new highs.  Draw your trend lines, and while it’s nice to be gung-ho with a steadily rising market, it pays to take heed to understand that trends will resume but at a greatly reduced and more sustainable pace. 

– The Faceless Trader

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