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Written by and copyright © 2005-2011 by Thomas N. Bulkowski. All rights reserved.
For more information on this pattern, read
Trading Classic Chart Patterns  ,
pictured on the right, pages 9 to 28. That chapter gives a complete review of down-sloping trendlines. Below is just a sliver of the information contained in the book.
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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Down Sloping Trendline Chart Pattern
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Down-Sloping Trendlines: Identification Guidelines
| Characteristic | Discussion |
| Log scale | Use the logarithmic scale. Price will signal a trend change sooner on the log scale than on the arithmetic scale. |
| Minor highs | Draw a down-sloping trendline along
the 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. |
| Touches | The more touches a trendline has the more powerful the move after a trendline pierce. |
| Spacing | Widely space touches (over the median 29 days each) suggest a more powerful move post breakout. |
| Length | Long trendlines (more than the median 139 days) are more important than short ones. They lead to more powerful rallies after the trendline pierce. |
| Slope | Shallow trendlines (up to 45 degrees) are more reliable than steep ones (over 60 degrees). Again, they lead to more powerful moves after the trendline pierce. |
| Volume | A downward volume trend results in a more powerful rally after the trendline pierce. |
In each of the above categories,
I examined over 200 trendlines and evaluated the price performance after price
closed above the down-sloping trendline. I
tracked price until it peaked and dropped by at least 20% (a trend change). The
move from the trendline breakout
price to the high price was the measure.
For example, I found 85 trendlines
with 3 price peaks touching the trendline. Price after the breakout climbed 33%.
This compares to a rise of 38% from 63 trendlines
with 4 touches, 57% rise from 40 trendlines with 5 touches, and so on. I concluded
that the more touches, the more powerful
the rally after the trendline breakout. Consult my Trading Classic Chart Patterns book
for more information on the results.
Down-Sloping Trendlines: The 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 to the left 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 80% 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 80% to get 1.60.
Suppose the breakout at point B is at 11. That would give a price target of 12.60
(11 + 1.60).
-- Thomas Bulkowski
Copyright © 2005-2011 by Thomas N. Bulkowski. All rights reserved. People with braces put their money where their mouth is.
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