As of 09/22/2021
  Indus: 34,258 +338.48 +1.0%  
  Trans: 14,001 -67.19 -0.5%  
  Utils: 898 -0.44 0.0%  
  Nasdaq: 14,897 +150.45 +1.0%  
  S&P 500: 4,396 +41.45 +1.0%  
YTD
 +11.9%  
 +11.9%  
 +3.9%  
 +15.6%  
 +17.0%  
  Targets    Overview: 09/15/2021  
  Up arrow35,600 or 33,800 by 10/01/2021
  Up arrow15,400 or 14,000 by 10/01/2021
  Up arrow930 or 890 by 10/01/2021
  Up arrow15,600 or 14,700 by 10/01/2021
  Up arrow4,650 or 4,350 by 10/01/2021
CPI (updated daily): Arrows on 9/22/21
As of 09/22/2021
  Indus: 34,258 +338.48 +1.0%  
  Trans: 14,001 -67.19 -0.5%  
  Utils: 898 -0.44 0.0%  
  Nasdaq: 14,897 +150.45 +1.0%  
  S&P 500: 4,396 +41.45 +1.0%  
YTD
 +11.9%  
 +11.9%  
 +3.9%  
 +15.6%  
 +17.0%  
  Targets    Overview: 09/15/2021  
  Up arrow35,600 or 33,800 by 10/01/2021
  Up arrow15,400 or 14,000 by 10/01/2021
  Up arrow930 or 890 by 10/01/2021
  Up arrow15,600 or 14,700 by 10/01/2021
  Up arrow4,650 or 4,350 by 10/01/2021
CPI (updated daily): Arrows on 9/22/21

Bulkowski on Down-Sloping Trendlines


Revised and expanded: 5/13/21

Down-Sloping Trendlines: Summary

Price follows trends. When you draw a down-sloping line along the price peaks, price often touches the line and falls away without piercing it. The line is called a trendline because it shows the price trend.

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For more information on this pattern, read Trading Classic Chart PatternsTrading Classic Chart Patterns book., pictured on the right.

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-- Tom Bulkowski

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Down trendline chart pattern

Down Sloping Trendline Chart Pattern

Down-Sloping Trendlines: Identification Guidelines

CharacteristicDiscussion
Log scaleUse the logarithmic scale. Price will signal a trend change sooner on the log scale than on the arithmetic scale.
Minor highsDraw a down-sloping trendline along price peaks. That way, when the trend changes from down to up, you'll know with a trendline pierce. The numbers in the above chart show price touching the trendline five times.
SpacingWidely space touches (median 13 days between touches) suggest a more powerful move post breakout: 52% (more touches) versus 50% (fewer touches).
LengthLong trendlines (more than the median 48 days) lead to more powerful rallies after the trendline pierce: 52% (longer than median) versus 50% (shorter than median).
SlopeShallow trendlines lead to more powerful moves after the trendline pierce (median slope: 0.05 (not degrees), 56% for shallow, 46% for steep).
VolumeA downward volume trend results in a more powerful rally after the trendline pierce: 52% (falling volume) versus 50% (rising volume).

In each of the above categories, I examined 3,274 trendlines in bull markets and evaluated the price performance after price closed above the down-sloping trendline. I tracked price until it reached the ultimate high (peaked and dropped by at least 20%). The move from the trendline breakout price to the high price was the measure.

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Down-Sloping Trendlines: The Measure Rule

Down trendline measure rule

Use the measure rule to predict how far price will rise after an upward breakout (a price pierce) from the trendline. The figure shows a down-sloping trendline with price breaking out upward at point B.

From the breakout, find the prior minor high trendline touch. I show it as point A. Measure the widest distance between those two points, measured vertically. In this case, that's the distance from C to D. Multiply that distance by 56% because that's how often this method works when a full height is used, and project the result upward from the breakout price -- the point where price pierces the trendline.

For example, if the low at C is 10 and directly above that at point D, the trendline is at 12, the difference is 2. Multiply this by 56% to get 1.12. Suppose the breakout at point B is at 11. That would give a price target of 12.12 (11 + 1.12).

If you use the start (top) of the trendline, price reaches it 77% of the time. So the start of the trendline can act as an easy-to-find target.


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Down-Sloping Trendlines: After the Breakout

Down trendline breakout and following

What happens after the breakout from a down-sloping trendline? Let's use the figure on the right and data to find an answer.

Both trendlines slope downward and price stages an upward breakout at A (in both lines). That's the first place where price closes above the trendline.

Notice that price doesn't rise much (to B) before tumbling to C (in both lines, respectively). Looking at many trendlines shows a similar pattern, where the trend after the breakout doesn't amount to much.

To avoid the situation shown by the two trendlines, look for a shallow inbound price trend.

Shallow Inbound Trend

I noticed a relationship between the slope of the inbound trend and performance. Flat or nearly flat inbound trends led to better performing trendlines. A check of the data confirmed this observation.

The first rule of better performance is to look at the slope of price before the start of the trendline. If it looks flat or nearly so, then expect better performance after the breakout from the trendline.

If you're hard core, then the slope from the trend start to the start of the trendline should be between -.007 to .05. Trendlines within that range showed gains averaging 56%. Outside of that range and the gain dropped to 47%. That's a substantial difference.

To calculate the slope, find where the trend starts and the trendline starts, then use the closing price for each. Plug the information into the following formula:

Slope = (TrendStart - LineStart)/(Date of TrendStart - Date of LineStart). To put the formula into words, it's the change in y divided by the change in x on a price chart.

After the Breakout

After price breaks out upward from a trendline, 59% of the time, a throwback will occur. It's best to assume one will happen and price will attempt to return to the trendline. Using numbers, price rises an average of 5% in 9 days before turning down on the return journey. It takes a total of 14 days (after the breakout) to complete the throwback move. After a throwback completes, the stock rises 81% of the time.

In both trendlines shown in the above figure, price didn't recover but continued lower to C.

Failure Rates

The following table shows failure rates for down-sloping trendlines.

Failure rate: 5%  10%  15%  20%  25%  30% 
Failures: 13%  24%  32%  39%  45%  50% 

I counted the number of trendlines with moves to the ultimate high and sorted them into percentage columns. For example, I found that 13% of the trendlines saw price climb no more than 5% after the breakout. I call that column a "5% failure." Another example: 24% of the trendlines see price climb no more than 10%. Half the trendlines will fail to see price rise by 30%.

Using the numbers, you can get a sense of how price behaves after the breakout. You'll have a throwback half the time and then price begins a recovery. The average rise is 51% with a median rise of 30%. Those numbers come in a bull market from 3,274 trendlines taken from 645 stocks, with data from February 1991 to April 2021. Each pattern needed to be above $5 per share.

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-- Thomas Bulkowski

See Also

 

Support this site! Clicking any of the books (below) takes you to Amazon.com. If you buy ANYTHING while there, they pay for the referral.

My novels:  Bumper's Story Head's Law

Chart Patterns: After the Buy Getting Started in Chart Patterns, Second Edition Trading Basics Fundamental Analysis and Position Trading Swing and Day Trading Encyclopedia of Candlestick Charts Trading Classic Chart Patterns

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