Lecture Notes on Trading and Technical Analysis

Introduction to Chapter Two: Drawing Lines

• Trading and technical analysis often seem simple online, showing large profits.
• Books may glorify breakouts; understanding trend line breaks is crucial.
• Skeptics say lines are meant to be broken, but properly drawn lines reveal important price behaviors.

Drawing Support and Resistance Lines

• Support and resistance lines are not just for beginners.
• Correct placement can highlight behaviors in trading ranges.
• Horizontal lines are key in identifying trading ranges.
• Example: Trading range examined from September to December 2003.
  • Resistance and support lines identified at different highs and lows.
  • October and November showed support and resistance struggles.

Understanding Trading Ranges

• Trading ranges can exist within larger ranges.
• Example of LBLT: October 15th false breakout.
• Trading ranges can be resolved through lateral movements, apex formation, or false breakouts.

Trend Lines and Trend Channels

• Trend lines indicate the angle of advance or decline.
• Downtrend lines are drawn across lower highs, uptrend lines across rising supports.
• Channels combine demand lines (uptrend) and supply lines (downtrend) to form corridors.
  • Example: 10-year Treasury note, November to December uptrend line analysis.

Parallel and Broadening Channels

• Channels can broaden to incorporate lateral movements.
• Example: CRB index from 2001 low, with multiple touch points for trend confirmation.

Reverse Trend Lines and Channels

• Reverse trend lines use dashed lines and show resistance/support reversals.
• Can mark ends of swings and indicate potential reversals.

Examples and Applications

• S&P 2011 chart shows volatile trading ranges and reversal indications.
• Live cattle chart demonstrates reverse trend channels spanning years.
• U.S. Steel example: Breaks in reverse trend lines indicating trend reversals.

Considerations in Drawing Trend Lines

• Steep trends might not fit within normal channels, requiring broadened or reverse channels.
• Creative placement of lines is necessary, but forced placements should be avoided.
• Practice and understanding of price-volume behavior are crucial for effective chart analysis.

Conclusion

• Understanding support, resistance, trend lines, and channels is crucial for technical analysis.
• The next chapter will explore the "story of the lines."