Slopes, Patterns And Trendline Validations

THE BULL FLAG

Calculating a slope really is very simple. We'll start with the Bull Flag at the left of the chart, at Blue #1.

Once we have two data points, which would be Blue #1 and Blue #3, we subtract the two in order to get the distance between them, so 75.40 - 74.15 = 1.55 points. In order to find the slope of that trendline, which means the rate at which the trendline is declining each session, we need to count the number of days that there were between the two data points, which was nine days.

We then divide the distance between our two data points, which was 1.55 points, by the number of days between those data points.

1.55 divided by 9 = Slope: 0.1722, or a little over seventeen cents.

Guess what? IT'S THAT SIMPLE! We all now know how to calculate a slope!

Each session, we now know that the trendline is declining by 0.1722 and we can subtract that amount each session, beginning with 74.15, which is Blue #3. We don't need to go all the way back to Blue #1.

So, for example, the trendline for the session after Blue #3 would be:

74.15 - 0.1722 = Trendline at 73.9778 for the next session after Blue # (74.15), which would be February 4.

IMPORTANT NOTE:

If the trendline is steep, like this one, it's important to carry out the slope enough decimals, i.e. the full 0.1722, and not round it off to 0.17 (seventeen cents), or the calculation for where the trendline is each session can be thrown off quite a bit.

For better accuracy, it is a good idea when price is coming close to a trendline to count the days since Blue #3, muliply that number times our slope of 0.1722, then subtract it from Blue #3.

Example:

When the stock was breaking out, it was important to know where that trendline Blue #1-#3 was! I put comments for February 14, 15 and 16 on the chart, for easier viewing.

After the upside breakout, February 15 was a "Ye a Olde Knuckle-biter" close for The Bulls, with the stock closing back below the breakout, leaving them wondering if they had a valid breakout, or not. The only way for The Bulls to know in the next session, February 16, whether or not they had a valid breakout, was to know where the trendline came in on February 16. The Bulls needed the stock to CLOSE back above it.

Again, for accuracy, it's better to do a full calculation, rather than a daily subtraction, because those "Knuckle-biters" are a key juncture for decision-making: Do we want to stay long on a SECOND close back below the breakout?

February 16 was the 9th session since we established the slope of 0.1722, at Blue #3. Not Blue #1. BLUE #3.

9 days X 0.1722 = 1.5498 points, subtracted from BLUE #3 (74.15),not Blue #1.

74.15 - 1.5498 = Trendline at 72.60002 on February 16.

We can see how helpful that calculation is when we look at the February 16 candle. The stock open at 72.78, came back and planted a foot just about smack on the 72.60 trendline, validating it as support (the session low was 72.56), then took off to the upside and CLOSED well above the breakout.

That kind of information is VERY helpful. Buying the stock near that 72.60 trendline on February 16, or buying it after it opened at 72.78, went down and validated the trendline as support, then printed 72.79, a penny above the open, was an EXCELLENT entry into the stock.

Daytraders love that kind of setup. The "fast down" from the opening price (72.78) to validate a trendline, or to fill a gap, then a print of 72.79, above the opening price...they're all over that one!

We can see from the chart that, with the exception of the February 22 black candle, the targets of 75.70 and 79.77 got made handily, with thirty-eight cents extra on the upside, to the 80.15 high, on March 1. That is not always the case. There's no "always" in the stock market. Be aware of that. Targets just are what the pattern measurement suggests (math for the Bull Flag is at the bottom left of the chart), and are "what we're aiming for."

Note that the Long-Leggetty "Bearish" Doji Star of February 24 was NOT bearish. We see a lot of those single-day bearish-looking candles, like the Gravestone Dojis that we looked at in ARIA, which also were not bearish.

We'll stop here for now. That's a lot of information to absort. The next installment, which I'll do at some point in the future and add to this post, will be on The Channel, which begins at Black #1, on February 11. There are some additional notes on this chart regarding that pattern, and the Bearish Rising Wedge pattern, but I still need to review it to make sure that I've got the numbers right.

The above information at least will get you started on calculating slopes, calculating pattern targets, and understanding the importance of validated trendlines.

EDIT: I found a couple of math errors on the Channel pattern in the middle of the chart, so I've updated the chart as of 7:20PM EDT July 24, 2011 to reflect the corrections.