Converging Trendlines

Trendlines form channels and chart patterns, but in addition they often give indications of the strength or weakness of a move. Converging trendlines usually indicate weakness, or even a potential reversal.

Yesterday we closed at a down sloping trendline, and this morning reversed direction with a small gap. Today’s chart shows all of yesterday’s price action, and you can see how the yellow trendlines converge. That was an early warning that the selloff was losing strength.

There were three reversal indications at the bottom. First we hit the lower trendline. Second, price had reached the 127% external retracement of the last rally, which is often a turning point. And third, the reversal formed a Spring by breaking a support area and immediately reversing. A divergence would have been nice, but not really necessary.

The yellow trendline again formed temporary resistance, but then we broke through with a slight increase in volume. If you missed the bottom reversal, the pullback to the trendline (and Fib 38% retracement) was another potential entry. Then the market started giving conflicting signals.

When a first pullback is only 38% that often indicates strength. But when the next turn is only at a 62% extension (C=62%) that shows potential weakness and will often mark the end of a move. But then the blue uptrend line held, and the A-B-C became a Measured Move with the final B-C move equaling the original “A” rally.

By this time the blue converging trendlines were obvious, and the pattern looks like a WEDGE. A breakdown from a wedge usually retraces the entire pattern, but instead it just moved sideways for the rest of the session.

End result — we regained yesterday’s loss on slightly increased volume. But we did it in a manner that that wasn’t very convincing. I guess tomorrow I’ll just have to take it one trade at a time.