As of 12/02/2024
  Indus: 44,782 -128.65 -0.3%  
  Trans: 17,545 -73.73 -0.4%  
  Utils: 1,057 -21.90 -2.0%  
  Nasdaq: 19,404 +185.78 +1.0%  
  S&P 500: 6,047 +14.77 +0.2%  
YTD
 +18.8%  
 +10.4%  
 +19.9%  
 +29.3%  
 +26.8%  
  Targets    Overview: 12/02/2024  
  Down arrow44,000 or 46,000 by 12/15/2024
  Down arrow17,025 or 18,000 by 12/15/2024
  Down arrow1,025 or 1,100 by 12/15/2024
  Up arrow20,000 or 18,500 by 12/15/2024
  Up arrow6,200 or 5,900 by 12/15/2024
As of 12/02/2024
  Indus: 44,782 -128.65 -0.3%  
  Trans: 17,545 -73.73 -0.4%  
  Utils: 1,057 -21.90 -2.0%  
  Nasdaq: 19,404 +185.78 +1.0%  
  S&P 500: 6,047 +14.77 +0.2%  
YTD
 +18.8%  
 +10.4%  
 +19.9%  
 +29.3%  
 +26.8%  
  Targets    Overview: 12/02/2024  
  Down arrow44,000 or 46,000 by 12/15/2024
  Down arrow17,025 or 18,000 by 12/15/2024
  Down arrow1,025 or 1,100 by 12/15/2024
  Up arrow20,000 or 18,500 by 12/15/2024
  Up arrow6,200 or 5,900 by 12/15/2024

Bulkowski on Up-Sloping Trendlines

Revised, new statistics, 5/14/2021. The measure rule was incorrect. I changed the 26% to 63%.

Up-Sloping Trendlines: Summary

Price follows trends. When you draw an up-sloping line along price valleys, the stock often touches the line and rises away from it without piercing it. The line is called a trendline because it shows the price trend.

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My book, Trading Classic Chart PatternsTrading Classic Chart Patterns book., pictured on the left, has two, yes, two, chapters dedicated to trendlines.

If you click on the above link and then buy the book (or anything) while at Amazon.com, the referral will help support this site. Thanks.

-- Tom Bulkowski

$ $ $

Identification Guidelines
The Measure Rule
Trading
After the Breakout
What to Avoid
See Also

Up trendline chart pattern

Up Trendline Chart Pattern

Up-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 an up-sloping trendline along the price valleys. That way, when the trend changes from up to down, you'll know with a trendline pierce. The numbers in the above chart show price touching the trendline at four minor lows.
SpacingWidely spaced touches (over the median 12 days each) suggest a more powerful move post-breakout.

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For the discussion which follows, I logged 3,720 trendlines with 3,172 of them happening in bull markets (only bull market results are reviewed in this article). I measured the move after the breakout to the ultimate low and after the third trendline touch to simulate trading them (more about that later). I used 699 stocks with trendlines priced above $5 per share from data starting in March 1991 through April 2021. Not all stocks covered the entire period.

Up trendline measure rule

Up-Sloping Trendlines: The Measure Rule

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

If you'd like to use the classic measure rule, then from the breakout, find the prior minor low trendline touch. I show it as point A. Measure the tallest distance between those two points (re, A and B), measured vertically. In this case, that's the distance from C to D. Multiply that distance by 63% because that's how often this method works when a full height is used. Project the result downward from the breakout price (B) -- the point where price pierces the trendline.

For example, if the high at C is 10 and directly below that at point D, the trendline is at 8, the difference is 2. Multiply this by 63% to get $1.26. Suppose the breakout at point B is at 9. That would give a price target of 7.74 (9 - 1.26). If the projected decline is less than 0, ignore the result.

You might look for underlying support where price might stop and reverse instead of relying on a number.

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Up-Sloping Trendlines: Trading

Up trendline trade

I was looking at trendlines, trying to discover if there was a way to trade them and make money. I thought that if I could buy a stock showing a trendline at the third touch, ride price higher until I got a downward breakout and then sell, I could pocket the difference.

The chart on the right shows an example. The 3-touch trendline is in red. It ends in mid June. Four days later, buy at the open and hold until the day after price closes below the trendline (the orange/brown line). The difference between the buy price and the sale price is profit. If you have the courage to buy sooner at or after the third touch, then profits would likely increase.

I found that on 3,172 trades, you'd make an average of 0.7% or lose a median of 0.9%. The win/loss ratio was 37%. In other words, this method didn't work well.

Along the way, I learned features about trendlines. For the tests which follow, I found the third trendline touch and waited 3 days (price bars) before buying at the open the following day (4 days, total, after the minor low). This is because my software uses 3 bars after a minor low to assure that it is, indeed, a minor low on the trendline.

Because the first close below a trendline worked better than a delayed exit, all tests which follow use the first close as a sell signal (sell at the open the next trading day). I explain the delayed sale idea next.

  1. Sell immediately? Is it better to sell immediately at the open the day after price closes below an up-sloping trendline or wait? Answer: Sell immediately. To test this, I sold after price closed below the trendline or waited for 2 closes below the trendline and only if the second price bar also had a lower close and lower low (than the prior bar). The idea is to allow price to recover from minor trendline pierces without selling. I found that selling on the first close had a median loss of 0.9% compared to a median loss of 1.3% after the delayed exit. Waiting to sell costs you money.
  2. Trendlines with more minor low touches perform better. Trendlines with 3 touches lost 2.1%. Trendlines with 4 touches made 2% (3 and 4 touch trendlines had over 1,000 trades, each) going up to 7 trendline touches with gains averaging 7.5% (but only 23 samples).
  3. Long trendlines made more money than short ones. Long trendlines made 2.9% and short ones lost 1.4%. The median between short and long was 44 days. In other words, buying after the 3rd touch on a trendline longer than 44 days made money, on average.
  4. Shallow trendlines made more money than steep ones. I measured the slope of the trendline from low to high divided by the start and end dates, respectively (change in y divided by the change in x). The median slope was 0.05. Trendlines steeper than 0.05 lost 0.7% but those more shallow made 2%. In fact, splitting the slope into shallow, medium, and steep shows the best performance for shallow trendlines followed medium ones and then steep ones, in that order.
  5. More days between touches is better. Trendlines with touches spaced wider than 12 days saw gains averaging 2%. Trades in trendlines shorter than 12 days lost 1%.
  6. Shallow inbound trend is best. Finally, I measure the slope from the trend start to the beginning of the trendline. If the slope of the price trend leading to the start of the trendline was flat to slightly down, performance was best. If the inbound trend was steep, either up or down, the trendline under-performed. The slope which work best was between -0.03 and +0.02. Outside of that range and performance deteriorated.

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Up-Sloping Trendlines: After the Breakout

Up trendline in a downtrend

Pictured is an up-sloping trendline in a downward price trend. I found this type of setup happening frequently in the charts I looked at. As bad as it looks, the difference between an up-trendline in an upward versus a downward trend is just one percentage point in performance: 13% (in uptrend) versus 14% (in downtrends). That's the average drop after the breakout to the ultimate low.

A review of the statistics shows that the 5% failure rate is 30%. Almost a third of trendlines with downward breakouts will see price drop no more than 5%. Half (52%) will drop no more than 10%.

Briefly, I found the following based on the drop from the breakout price to the ultimate low (which is different than the trading method described above.

Up-Sloping Trendlines: What to Avoid

I spent 6 weeks looking at trendlines and studying them. I found several scenarios which appeared and tripped up trendlines. Here's a brief review.

I found other scenarios which happened infrequently.

Here are more tips, in slider format.


1 / 4
chart pattern

Top trap. Price at A starts forming a top where price bumps up against overhead resistance and moves sideways. Any bullish pattern trying to push price through that resistance struggles to see the stock move higher. I was able to make money only 35% of the time trading this scenario.

2B is next.
2 / 4
chart pattern

2B. In this scenario, price rises following a trendline (red line) and comes near to (B) or rises slightly above a nearby peak (A). Price tumbles, piercing the trendline and the trade becomes a loss.

This chart shows an example of the 2B scenario. Entry is after the third trendline touch (C). Price moves horizontally for two weeks before taking a plunge and piercing the trendline.

BARR top is next.
3 / 4
chart pattern

BARR top. BARR is short for a bump-and-reversal top chart pattern. In this scenario, the vertical height during the lead-in phase (B) is small compared to the height of the bump phase (A). Entering a buy after the third trendline touch leads to a mistake when price drops through the trendline and continues lower to C (and below).

Fast down to TL next.
4 / 4
chart pattern

Fast down to TL (trendline). In this scenario, price makes a fast plunge from B to A (a least two days long, sometimes with tall price bars and little overlap). Although entering a few days after A assures a third trendline touch, price recovers to C only to plunge through the trendline. Entering using this scenario worked just 35% of the time.

The End.

-- Thomas Bulkowski

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See Also

 

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