11.16 Consider the Trendline [Partially Free Article]
Nice to work with you today as well.
This is ERE.
*This article is not intended to indicate or recommend trading timing.
Please make your own investment decisions.
Market Summary
The weekend stock market closed higher across the board.
As expected, the Dow Jones Industrial Average breached the 29,300 level, which had been a hurdle, with a decisive gain despite approaching it with a slight hesitation, and the upward momentum strengthened.
As stocks rose, the dollar weakened somewhat, and the dollar index trended lower.
Looking by sector, rotation remains a dominant theme, and it still feels like the strong rise is yet to come.
A rehearsal for post-COVID positioning
I found last week’s market moves highly informative for thinking about post-COVID dynamics.
When expectations for vaccines boosted gains, the “stay-at-home” stocks that had risen steadily during the pandemic cooled as fears of overbought conditions surfaced, prompting a shift toward stocks that had supported the existing economic system.
In the long run, it seems unlikely that IT-related sectors will decline; it could be said that the surge has merely cooled down.
Although the market’s appreciation for the fundamentals is still a future story, the notable reaction of cyclicals that had continued to move at low levels suggests that the world’s vaccine expectations, and Pfizer’s vaccine distribution beginning, will be interesting to watch for the market’s reaction.
Thinking about Trends
It is fine to simply connect lows to highs, but I would recommend thinking about the essence of the word “trend” and considering the flow.
Has there been a trade where you entered after a break of the line but moved less than expected and ended up taking a loss?
If you can see the trend, not just the trendline, you might be able to resolve it a little better.
First, roughly trace price movements before drawing a trendline
Here I will explain based on the Dow Jones Industrial Average.
To grasp the trend, ignore the tiny price movements and trace the price action to reveal the rate of ascent and descent.
The trendline itself is formed by the time involved in the rate of rise or fall, and the so-called trend is somewhat intuitively plausible when considering the time ratio of price movement (a term I coined that is not widely used).
With this principle in mind, tracing the price movements yields the following image.
If you add a bit more information,
I place importance on the center line of the channel because it helps grasp the direction of the trend.
Viewed this way, isn’t it understandable why simply drawing a line connecting the lows and breaking it did not lead to a sharp drop, as shown in the image below?
In this state, the key is the red horizontal line serving as the neck, which is why I described it in weekend articles.
Whether to draw from the wicks or from the bodies is not the point; understanding the broader trend makes it easier to navigate.
By the way, what makes this trend hard to understand is this section
