- Bullish trend
- Bearish trend
- Neutral or stagnant
One can earn profit in both bull and bear trends. In bull market
one can buy shares at a price and then sell at a higher price later.
This is called bull operation. It is also called as “going
long or stay long”. The
person doing such business is called as bull operator.
In bear market
one can sell first and later buy from market at a lower price and then
settle to the buyer. It is possible in a bear market. In a bear market
the prices initially rule high and later decline. This operation is
called bear operation or
Shortselling. The person doing such business is called bear
operator. It is easy to understand a bull operation. But how the bear
operator gets profit?
For example take the settlement in National stock Exchange. In
NSE the share transactions are settled on weekly basis. Wednesday is the
first day and Tuesday is the last day for them.
If one buy a share on Wednesday and sell the same share after any
day before the proceeding Tuesday (within the week) he neither required
to deliver the document or pay the full amount. On the other hand the
broker or the client will pay the differences of money. If it is profit
the bull operator will get the differences of the buy / sell
transactions. If it is lose the bull operator has to pay the balance
money against the difference of buy / sell transactions.
Contrary to this the bear operator first sells the share in the
market and later buys within the week and settles his transactions.
In a declining market the bear operator earns profits and in a
rising market bull operators and majority of general public earns
profits. Due the technical difficulties and settlement necessitates
there are only a few people in shortselling or bear operation. So the
majority of general public are either investors or bull operators.
Trend,
which are brief, are called as major trends, minor trends and
intermediate trends.
There
are two types of trend lines.
- Blue Line or Down
trend line
- Red Line or Up trend
line
Trends, which are very, brief called minor trends; those lasting a
few weeks are known as intermediate trends; and trends lasting for a
period of months are major trends.
Types
of Analysis: -
- Valid penetration
- Fan lines
- Speed resistance lines
- Trend Channels
- Pull back
- Andrew Pitch work
- Fibonacci Fans
- Trend line with some
patterns
Trend
line theory states that once a trend line is penetrated, the trend,
which was previously in force, is reversed. Thus is a blue line is
penetrated it is a buy. If prices penetrate below the red line it is
sell signal.
The
movement of the trend line can be confirmed in following way.
i.
Penetration of trend line with a high / good volume transactions
ii.
A pattern of higher top / higher bottom in successive moves
iii.
Penetration fan / speed resistance lines will signal faster moves
iv.
Penetration of immediate resistance line signal further scope of
appreciation.
v.
Penetration of trend line is healthy along with some other
favorable position on
indicators as below
When
12 day Rate of change (ROC) is above zero
When
MACD indicator is above zero
When
12-day price Oscillator is above zero
When
14 day RSI (relative strength index) is above 50
When
Ultimate Oscillator / ROC / RSI / MACD shows higher top / higher bottom
When
prices are above 50 day moving averages
Now
let us assume your down trend line has just been decisively broken and
you now feel you are starting a new uptrend. Then prices start moving up
and you will get a higher bottom. Then with two clear bottoms you may
draw an uptrend line / red line. So far prices are moving above the red
line you may buy and continue to hold. As per Elliott wave theory when
the primary market is up it goes up 3 times. (Say 3 tops.). Accounting
intermediate waves Elliott named as 5 waves.
So whenever you meet 5th wave / 3rd top
partly book profit is advisable.
Figures
to explain Blue line and red line
In addition to that you may find that very steep trend lines are not
very authoritative in that a brief sideways movement
or consolidation will
often break them after which prices will shoot up again.
A steady less steeper trend line usually has more significance
than a steep / vertical slope trend line.
Valid Penetration: -
As
per the trend line theory when prices penetrates the blue line / down
trend line up it is a buy signal. Similarly when prices penetrate down
below the red line or uptrend line it is a sell signal. For valid
penetration we may have a number of clues
1.
Price penetration with a high volume of transaction
2.
A higher top / higher bottom moves after penetration
3.
Prices are steadily moves above the red line / uptrend line
4.
Prices are above 12 day / 50 day moving averages
5.
The market indicators such as ROC, RSI, MACD, and Ultimate
oscillator are positive say above zero in a bull market.
6.
Price moves from some powerful patters such as wedge, down
channel / tilted rectangle, ascending triangle, Flag and pennant
7.
Consolidation after a major down move / trend
Speed
Resistance lines: -
Speed resistance lines are (also called as 1/3rd, 2/3rd
lines) a series of trend lines that divide a price move into 3 equal
sections. They are similar to interpret as fibonacci fans.
Interpretation:
-
Speed resistance lines are used to define price support levels.
For example, if a security is in a rising trend, its price will usually
stay above the 2/3rd speed line. If prices do penetrate the
2/3rd line they will generally fall all the way to the 1/3rd
line before regaining support.
Trend Channels: -
In some companies the uptrend will go steady and even it will
appreciate to double, treble, quadruple, quintuple…likewise. For
steady moving companies we can draw channels and predict in an
arithmetic chart. For companies, which fly to dizzy heights, we can draw
channels in a semi- logarithmic chart.
In both the cases once the prices break the channel’s red line
the trend is reversed.
Pull
back: -
Pullbacks or throw back or Retracement often occur after breaking
the trend line. In Elliott wave theory it explains that such pullbacks
occurs in the 5th wave say in the last wave or 3rd
rally. The 5th wave rise is full of news and euphoria and
even a small decline attracts a lot of investors as you have seen this
year the buyers of software companies such as Satyam computers, NITT,
Silverline even at high prices. They and traders are the cause of such
pullbacks or retracements. We can use such pullbacks for a good
shortselling in an already high-priced company and for buying in a
company, which crossed a downtrend (3 down cycles) recently.
Best way is partly book profit / sell when penetrates the trend
line and sell remaining in the pullbacks / retracements.
Andrew
Pitchwork: -
Andrew pitchwork is
a trend line study consisting of 3 parallel lines. The lines are drawn
from 3 points that you select.
The
trend lines are drawn as follows. The first trend line begins at the
left most point selected and is drawn so it passes directly between the
right most points. This line is the handle of the pitch work. The second
and third trendlines are drawn beginning at the right most points and
are drawn parallel to the first line. These lines are the tines of the
pitchwork.
Trendline with Patterns: -
Trend lines will have more weightage when a breakout comes from
some pattern.
Generally
two or more trend lines accommodate patterns. Patterns will be discussed
in separate chapter. When prices are coming with a breakout from
triangle, rectangle, wedge, channels, flag and pennant and head and
shoulder patterns. Detailed pictures can be viewed in patterns chapter
Generally trendlines are a little delayed signal as moving
averages but gives a clear view to the investor.
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