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Simple trend lines are by far the simplest of all tools - especially when used on a line chart:
click to enlarge
I say a line chart as that takes the “busyness” out of the chart – although I can see an argument for using bar charts also for trend lines and occasionally I will look at a bar chart.
Many analysts will also have a view about how many times the trend line must touch a low or high. I don’t. I look for a ‘line of best fit’ – albeit the lower band of what might be an invisible trend channel. I don’t use a channel as in the case of the strong trend from 2003 to 2007 the band will be generously wide and that will get you out too late. If that needs more explaining please let me know.
The other attraction of the line chart is that it is so freely available on numerous websites so if you are not travelling with a lap top and do not have access to the myriad of tools in say ProfitSource then this is still a great substitute that will keep you out of trouble.
The trend line can be used over any time frame – yearly, right down to seconds intervals. So it depends on your time frame.
My view is that when we are looking at the big picture – that is, when to get out and/or when to get in - critical time frame decisions – then I believe a trend line is all telling.
So in the A trend line above we were given a clear signal to enter the market in March 2003 and in the case of the B trend above we were told when to get out – March 2008 – five years later.
If you use say a daily or weekly trend line then unless there is a strong trend then you will be ‘whipped’ by the market. It will entice you in on numerous occasions and send you packing too many times also, when the market is heading south. So it is possible – perhaps lucky – to have got out earlier than March 2008 by using a weekly or even daily chart. But here is the fine tuning. If you were using Elliott, which is what I use as my primary tool, you would have been out by January/February. Still, getting out in March would have avoided some cold sweats and sleepness nights. Yes I have been there.
In the big scheme of things we need to have a point when we say ‘it is time to move’. And in the case of the 2008 I believe one needs to have said yes, this is a point when I need to go.
Lets now look at a weekly chart:
click to enlarge
You could argue we should have re-entered the market in March 2009. If you were lucky to buy into the March 2009 bottom, well done. But the reality is that most bought back at levels we are now seeing. And these are positions where it would be difficult to argue strongly that are really solid. In broad terms, as no doubt there will be individual stocks that have done really well in the last three years.
So my last point is that trend lines are for trending markets and right now we are in a range-trading market. The trick is to identify when a new trend is developing and the market will break out from the upper band of the range trading.
That I will not theorize about, but rather I will be hoping to catch that move and will share it with you at the time.
Enjoy the ride
Tom Scollon
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