This is it. The Narnia of trend lines is chronicled to its happy end right here. We are in the final installment today. We’ve covered three of the four major trend lines.

There’s a world more that could be said about reading charts, but we’ll have mercy on the folks who cringe every time they see an article with a chart and some doodles drawn on it. The trend lines are basic and if you ever squint at a price chart trying to figure out what it means, this is the one thing you can learn most easily that will give you the most help understanding the information a chart has for you.

We started with bull support three weeks ago. Today we end with its running mate—bull resistance. To refresh: the support line goes under prices to prop them up. This bull resistance travels above the peaks in a bullish (rising) stock to keep prices in bounds.

“Bull resistance” sounds like an oxymoron, doesn’t it? Bulls like rising stocks so much that the higher and faster a stock rises, the more the bulls are inclined to pour in. Resistance, on the other hand, implies the opposite mindset, an aversion to buying.

Yet if you put those notions together, you will get a line that follows the waves of serial enthusiasm that bullish stocks often travel. You might say that this line is formed—not by bulls in general—but by different herds of bulls.

The first thrust of buying and the first peak is apt to come from the so-called smart money—the people who smell out new ideas early. This is often institutions, large investors and industry insiders. Once these buyers have all they want, the price drops back as their demand tapers off.

After that, the buying catches the attention of more people, especially speculators and traders who follow trends. And a new set of bulls comes into the pasture. The momentum “investors” are likely to get in the stock now because they follow price action avidly. When this bunch has loaded up and bought all they desire, the price backs down once more.

But now, the wider media have made note of this wonderful stock, and people who are neither insiders, institutions or other early movers, nor pure trend followers begin to hear stories about the stock. They think it sounds good. That little dip when the last bunch of bulls quit, looks like a good buying opportunity. Surely all those people who pushed the stock up so far must have known something? And yet another wave of bulls begins yet another push.

This is a simple three-wave story to explain the way a bull resistance line is formed. If cynicism were my style, I’d call the process smart money, clever money, dumb money. That oversimplifies, but it remains true that very often the last buyers are much less informed than the earlier ones and do not know it’s too late and the price is already too high.

In a long-term trend, the process may go on for dozens of ups and downs. But you can still get a notion if you are at a dangerously high buying point by looking at the bull resistance line that exists at the time.

By the way, I’ve mentioned in each of these articles that this series is chart smarts for investors. I’m assuming that you are also looking at the company and its quality, not just relying on charts alone. For investors, charts are a nice help, so let’s see what the bull resistance line can do for you.

We’ll look at Steel Dynamics, a good case for why you should track the company as well, and not just the chart by itself when using bull resistance:

Steel Dynamics makes basic steel products such as beams and structural steel, but it also processes and sells scrap metal. That scrap business has gotten more and more valuable with rising ore prices and is part of the reason for STLD’s upward trend. In fact, the stock has been on a bullish trend since 2002, as you can see on the monthly chart below:

In both of these charts, we have the same problem/challenge—where to fit the line. We can tell where to start, you choose the first significant peak after the stock makes its low.

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Pages: 1 2 3