Trendlines were one of the first technical aspects of the market to be discovered. Technical analysis is based on the fact that the prices of stocks move in fairly definite trends. Prices trend for individual stocks and for the market as a whole. Technical analysts use trendlines in two ways: first, to identify the direction of the movement of stock prices; second, to determine if and when the movement will change.

Let's take a look at trendlines and how they can work for you in technical trading!

What is a trendline?

According to Schabacker, "a trendline is a straight line drawn on a chart through or across the significant limits of any price range to define the trend of market movement."

Trendlines were one of the first technical aspects of the market to be discovered. Technical analysis is based on the fact that the prices of stocks move in fairly definite trends. Prices trend for individual stocks and for the market as a whole. Technical analysts use trendlines in two ways: first, to identify the direction of the movement of stock prices; second, to determine if and when the movement will change.

How do technical analysts use trendlines?

Stock prices move in trends. Once a trend has been clearly identified, it's likely to continue for a time. Technical analysts look to trendlines for their ability to support price declines or resist price advances.

When prices are moving neither up nor down, trendlines have little importance. Technical analysts looking for a profitable trendline will search for ones that slope up or down across the charts. These illustrate stock prices that are clearly trending either up (as illustrated by an "up trendline") or down (as illustrated by a "down trendline").

A trendline not only shows the trend but it also defines the limits of price swings of the stock. Assume a stock's price is trending upwards. If the stock's price dips significantly below its trendline, it may mark a reversal - the end of the trend.

No trend continues forever. Technical analysts are as concerned with the breaking of trendlines as they are with watching a trend continue.

How are up and down trendlines created?

An up trendline marks the upward progression of a stock's price. The line is drawn on the chart by connecting the low points the stock hits as its price continues to rise. Each low point will be successively higher than the previous low. This progression gives the trendline its upward slope.

A down trendline marks the downward progression in the price of a stock. It is formed by drawing a line on the chart connecting the high points the stock hits as it continues to fall. Each high point will be successively lower than the previous high. This progression gives the trendline its downward slope.

How do you know when a trendline is dependable?

It's not easy to determine whether or not a trendline is valid. Experience and common sense are two vital skills to possess. According to Schabacker, "no one can take a chart, immediately draw trendlines on it and be certain that they are the proper, or even the best, trendlines that could have been inserted for continuation of the current movement. That is just as impossible as is the absolutely certain forecast of definite future prices by any finite individual."

Cautious investors look for more than two points on the chart which touch the trendline. They'll be watching for a third and fourth point which confirm the trendline they've identified. In addition, experts advise watching for points on the trendline (highs for a down trendline, lows for an up trendline) that are fairly evenly spaced along the chart.

A common mistake is to draw a trendline that is too steep. Often a major movement in the market - which begins very steeply on a chart - will look like it's starting a trend. Many trendlines level off significantly after an initial burst of activity. This is where the experience of drawing and redrawing trendlines can pay off for the investor.

When drawing and redrawing trendlines on a chart, the investor can end up with a chart where the trendlines, which start out steeply, become ever shallower. These "trend reduction lines," drawn from the same starting high or low, create a fan pattern on the chart, giving them the name of "fan lines." According to Kahn, fan lines are, by definition, congestion zones as buyers and sellers position themselves.

Are there different types of trends?

Edwards and Magee divide trends into three basic varieties:

1. Major or primary trends - a trend of at least one year's duration which shows a rise or decline of at least 20%. When the primary trend is up, this is called a bull market. When it's down, it's referred to as a bear market.

2. Minor trends - brief fluctuations (usually less than six days and rarely longer than three weeks). Taken together these short-term fluctuations make up an intermediate trend. Experts will often define an intermediate market as composed of three or more minor fluctuations.

3. Intermediate or secondary trends - these trends move in the opposite direction of the primary trend and usually last for three weeks or more. For example, a secondary trend could be an intermediate decline during a bull market or an intermediate rally or recovery during a bear market. These secondary trends tend to retrace from one-third to two-thirds of the gain or loss in prices recorded in the primary direction.

How do you play the trend?

According to Achelis, "the goal is to analyze the current trend using trendlines and then either invest with the current trend until the trendline is broken, or wait for the trendline to be broken and then invest with the new (opposite) trend."

An investor should not rely on a trendline alone to make a trading decision. Trendlines are one tool that should be used in combination with other signals, including reversal and continuation patterns, which form over time.

All trading decisions are highly dependent on the type of trend being followed. Schabacker advises that it is much safer and much more profitable to play the intermediate movements that run in the direction of the basic major trend, rather than the minor corrections that run counter to it. According to the trader's axiom, the trend is your friend.

Many traders advise that primary trendlines serve the useful purpose of preventing investors from taking profits prematurely. In other words, the trendline tells investors to stay "long" if the trend is up, or "short" if the trend is down.

Keep an eye on fan lines. They can provide a sign of a reversal, signalling the end of a trend. Many analysts suggest that a reversal may occur when the third trendline is touched. According to Kahn, if that third trendline successfully supports or resists prices, then the original trend is still intact. Like any technical pattern, investors should hold their trading until the pattern is clearly and unequivocally resolved.

Patterns help greatly in interpreting trend lines. The formation of a pattern can have great significance in determining whether a trendline is broken. This serves as an important reminder to the investor to use all of the technical tools available and not to rely on any one single tool.

How do you know when a trendline is broken?

Schabacker warns investors to be more conservative with longer trendlines. The longer the trendline, the greater the possibility that its angle may be slightly off. This means that any price that appears to have broken the "slightly off" line may, in fact, not have broken the true trendline. "Consequently, the longer our line has run from its origin the more critical we must be of any price action which apparently breaks the line, and the more conservative in taking action on it."

There are several factors to consider in determining whether a trendline is definitively broken:
1. Volume - In some cases, penetration will be accompanied by increased trading in the stock.
2. Significant price movement - A slight correction in price is seldom a signal of a true break in an intermediate or major trend.
3. Closing price - Analysts will usually ignore breaks in the trendline which occur during the trading day, focusing instead on the closing price for the day.
4. Presence of a pattern - Analysts like to see a pattern formation at the end of a major or intermediate trend. A pattern signaling a reversal reinforces the importance of the break in the trendline.

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If you’ve spent any time at all following financial markets, you’ve probably heard of sector rotation. Certain sectors of business profit more in certain stages of an economic cycle. This simple arrangement of stages provides a useful road map to traders of most stripes. Here, we’ll look at the economic research to back it up and where to find it; the basic sectors of the economy; and the telltale signs of each economic stage.

By examining empirical evidence, the investor can attempt to create a framework for viewing present and future events as they unfold. There are two key questions the investor may want to ask:

1. Will the historic pattern hold, or will it be altered? To answer that, you'll need to ascertain whether the factors driving today's market are fundamentally unchanged, or whether the situation has evolved incrementally or even been radically changed.

2. Has the market already taken the anticipated future events into account? If the factors driving the industry are the traditional cyclical ones, the market usually will have taken them into account, because they are expected. If the factors represent a new element in the equation, then the market may not be expecting them and may not have adjusted accordingly.

Business Cycle and Relative Stock Performance

The following chart shows a typical business cycle and the points at which various economic sectors tend to outperform the broader market.

The chart above shows a typical business cycle and the points at which various economic sectors tend to outperform the broader market. Please note that the chart should be used for illustrative purposes only. The chart is a historical representation of stock performance movements relative to the business cycle and is not intended to convey any current or future economic outlook.

1. Consumer Non-Cyclicals

Stocks in consumer non-cyclicals (food) and consumer growth industries (cosmetics, tobacco, beverages) tend to experience fairly steady demand and are less sensitive to changes in the business cycle. These stocks typically attract investors when the economic cycle or bull market has matured, or is in the early stages of contraction.

2. Consumer Cyclicals (durable & non-durable)

Stocks in this category include durables and non-durables that are sensitive to interest rates as well as the business cycle. Investors typically seek them out when the economy is in the late stages of contraction.

3. Healthcare

In general, stocks in this sector move similarly to consumer non-cyclicals. This sector is considered defensive, meaning companies in this sector are generally unaffected by economic fluctuations. The healthcare industry consists of pharmaceutical firms, HMOs, biotechnology firms and medical equipment suppliers. Pharmaceutical companies are affected by competitive market shares, the pace of FDA approvals, patent lives, and the strength of the R&D pipelines. Many biotechnology firms are still in the development stage with their fortunes largely determined by investor perceptions of the relative merits of their R&D pipelines. With future new financing likely to be more difficult to obtain than in the past, strategic alliances between major drug companies and biotech firms are expected to increase.

4. Financials

Stocks in housing-related industries tend to respond well to falling interest rates and are often targeted by investors in the mid to late stages of an economic contraction. Non-mortgage-dependent banks are generally driven by commercial and consumer loan growth, and tend to be favored by investors during the middle of the cycle.

5. Technology

Technology stocks can be cyclical to the degree that they depend on capital spending and business or consumer demand. However, they may also have long-term growth potential as technological products find broader applications and as new technologies are developed. Technology stocks are usually popular during early to mid stages of an economic expansion.

6. Basic Industry

Profits of basic industries are driven by high utilization of capacity and strong market demand for products. Therefore, their stocks tend to be popular with investors late in an economic expansion. For basic material companies, the global economic picture and supply/demand equation also affect stock price movements.

7. Capital Goods

Capital spending tends to increase midway through the business cycle, as the economy is heating up and higher demand for products leads companies to expand their production capacity. Demand in global export markets is key for agricultural equipment, industrial machinery, and machine tools.

8. Transportation

Railroads and other surface carriers tend to react early to a pickup in the economy. Airlines are subject to cyclical fuel costs, usage versus capacity, and competitive pressures on airfares.

9. Energy

This category includes large integrated international companies, domestic exploration companies, and energy services companies. Each industry has its own dynamics, but ultimately all are driven by the supply and demand picture for energy worldwide. Political events have historically had a major impact on these industries. Stocks tend to be popular with investors late in the business cycle.

10. Utilities

Electric companies have historically been very sensitive to interest rates because of the large debt financing costs they must incur in order to build their infrastructures. These stocks tend to perform well in an environment of declining interest rates. Telephone companies may offer attractive long-term growth opportunities, as they diversify and compete in recently deregulated telecommunications markets.

11. Precious Metals

Precious metals and the stocks of companies that mine and process them can be affected by industrial and consumer demand, but the largest factor contributing to volatility in this category is generally inflationary pressure. Investors often flock to this category late in the expansion cycle.

Dow transports hit 8-month high; 50-day moving average crosses over 200-day

The Dow Jones Transportation Index rallied Friday to an 8-month high, and produced a technical event referred to as a 'golden cross' in the process.

The Dow transports were last up 112 points, or 2.2%, at 5,099, and have now gained 22% over the past 3 months. The index hit a high of 5,096.82, the highest level seen since Aug. 8.

Separately, the index's 50-day simple moving average came in at 4,751.70 on Friday, crossing above the 200-day simple moving average, which came in at 4,749.80.

Moving averages are used to smooth out daily swings in order to view underlying trends. When a shorter-term moving average, such as the widely viewed 50-day SMA, crosses above a long-term moving average, such as the more-closely watched 200-day SMA, many chart watchers see it as a sign that short- and long-term trends are moving in unison.

The last time the 2 moving averages crossed each other was on Sept. 20, when the 50-day fell below the 200-day. The index closed at 4,814.39 on that day, and fell another 16% before bottoming out at 4,032.88 in intraday trading on Jan. 22.

The last upside crossover was Nov. 15, 2006, when it closed at 4,830.43. The index rose another 14% before topping at an all-time high of 5,487.05 in intraday trading on July 18, 200

$TRAN One of the first things to go downhill in a recession are infrastructure stocks. In the year 2000, when the $SPY topped, Transportation ($TRAN), preceded it in the downturn. When the recent market topped at the end of October, Transportation had started heading down in August and continued to follow the correction down. Since January 9, $TRAN has massively outperformed SPY, with individual stocks within the sector, such as CSX and JBHT hitting all time highs. This has never happened to the Bear sensitive $TRAN heading into any previous Bear market. The conclusion? It's extremely unlikley we're heading into a Bear.

BNI

CSX

R

PCAR

Banking Index Medium Term Uptrend Line (Line Chart Which Takes Into Account The Closing Prices)

BAC

GS

DOW Jones Medium Term Uptrend Line

CAT Caterpillar (CAT) Issued strong guidance with profit growth expectation for 2008 and 2009 and raising guidance even more for 2010. (And RSTI, etc.) These are not "defensive, recession proof" stocks. They are consumer spending driven and, in many cases, high beta stocks (High beta will fall more in a market downturn than lower beta stocks). Either the market (and the economy) is going up or a lot of major players are dead wrong.

$SPX Medium Term Uptrend Line (Line Chart Which Takes Into Account The Closing Prices) A Bear market is defined as any market in which prices exhibit a declining trend and fall by 20% or more from peak to trough. The Market is not and the S&P 500 is not, by definition, in a Bear Market. The SP500, from peak to trough, has not declined into an "official bear market."

Historically, each time the Federal Reserve Board has slashed interest rates as drastically as Mr. Bernanke has recently done, the Dow and the SP500 have followed with massive rallies.

WASHINGTON, Jan 29 (Reuters) - The U.S. Federal Reserve's three-quarters of percentage point cut to the overnight federal funds rate on Jan. 22 was among its biggest and most abrupt reductions in borrowing costs since the early 1980s.

The Fed's policy-setting Federal Open Market Committee is expected to cut rates again at a two-day meeting concluding on Wednesday.

Historical comparisons to rate cuts earlier than 1990 are difficult to pinpoint because the Fed shifted gradually over the 1980s to a policy of attaining a specified level of the federal funds rate, a process that was completed by the end of the decade.

Since July 1990, the Fed has cut the federal funds rate by a half-percentage point 13 times, but never by as much as three-quarters of a point at one time until Jan. 22. 2008

Following are past instances when policy-makers have sharply lowered the federal funds rate over brief periods:

-- Dec. 6, 1991 to Dec. 20, 1991
From 4.75 percent to 4 percent, a fall of 75 basis points.

SP500 Rallied 3.04% (It was already end of year during this cut time frame but after a choppy January and March of 1992 the year ended up closing up very nicely especially the 2nd half.....huge rally)

-- Early September 1984 to mid-October 1984
From a range of 11.75 percent to 11.5 percent to around 10 percent, a decrease of 175 to 150 basis points.

SP500 Rallied 10.58% In the month leading up to the cut and closed up significantly on the 2nd half of 1984.

-- Aug. 2, 1982 to Aug. 27, 1982
From a range of 12 percent to 11.5 percent to around 9.5 percent, an easing of 250 to 200 basis points.

SP500 Rallied 9.88% THAT MONTH and never went down on a monthly basis for the rest of the year also going up some 30-40% from August until years end. (Yes the SP500)!

-- April 1980 to mid-May 1980
From around 20 percent to a range of 11.5 percent and 10.5 percent, a tumble of around 950 to 850 basis points.

SP500 Rallied 4.11% In April AND ANOTHER 4.67% in May and NEVER WENT DOWN on a monthly basis until December of that year after rising some 30%+ (Yes the SP500)!

Companies in the S&P 500 bought back stock at a record pace in 2007

IBM At the same time, these companies, in conjunction with share buy-back programs, are increasing R & D spending. R&D is one of the first budget victims of recession. CEO's (Cisco, VSEA, INTEL, IBM, KLAC, for eg.) increasing it heading into a recession? Extremely unlikely. CEO John Chambers says "CSCO will continue to be aggressive in acquisitions."

PCLN

VSEA

QQQQ:$SPX RATIO BREAKOUT

In a down market and during recessionary times, the broad spectrum of investors becomes risk averse. Defensive stocks, Pharmaceuticals for example, strengthen. High beta (higher risk) stocks suffer more than the general market as money is withdrawn and put into sectors perceived as being "low risk." In general, NASDAQ is composed of higher beta (high risk) stocks. Small Cap stocks are seen as being riskier than Large Cap stocks. The Dow and the S&P500, which contain the majority of the Large Cap "Blue Chip," low beta stocks are perceived as being safer, and being the best place to invest money in a down market/recession. The reverse of this is also true. Investors become less risk averse if they perceive a Bull market approaching or happening and move money from low beta Large Caps into the more profitable, (in an up market) high beta stocks in NASDAQ and among Small Caps.

The Ratio Chart of the higher beta NASDAQ "Power Shares", the QQQQ's plotted against the S&P 500 Large Caps (the SPY), has been in a Bullish Falling wedge since the brutal correction began in November. On this chart, a falling wedge is formed when the S&P consistently outperforms the QQQQs. A breakout to the upside occurs when the QQQQ's begin consistently outperforming the S&P500. When the breakout from a similar falling wedge occurred last August it led to the parabolic 6 week rally that topped October 31. Another breakout is occurring right now.

$SOX

NVEC

AAPL On the same note, AAPL expects to hit its sales target of 10 million iphones this year, despite the predictions and fears of analysts. Are RIMM and Steve Jobs "out to lunch" expecting robust sales with the Market heading down and a recession coming? Or do they see a bit more clearly than CNBC?

BIDU

SOHU

RIMM In a declining Market/economy, the expectation is that consumers will cut back spending on almost everything, up to and including essentials. Sales figures and expectations are not supporting this. Research in Motion (RIMM) recently announced it expects to sell 15% to 20% more units than previously predicted. "No slowdown. RIMM reads the same newspapers & watches the same TV as everyone else but has seen absolutely no signs of a slowdown in business;"

DRYS

RETAIL A broader measure of consumer spending is the Morgan Stanley Consumer Index ($CMR) which includes such companies as Procter & Gamble, Disney, Wal-Mart, Colgate-Palmolive and General Mills. The Ratio Chart of the $CMR to the SP500 (SPY) shows the cyclical consistently outperforming the S&P500 since November. The driving force behind the Markets, the consumer, continues to spend, like many CEOs, in the midst of all the pessimism.

WMT

COMMODITIES, INDUSTRIAL GOODS, VALUE STOCKS

JOYG

GLNG

RIO

HGT--HIGH DIVIDEND STOCK BEST VALUE WITH A ROCKIN CHART

Hugoton Royalty Trust operates an express trust in the United States. The company holds 80% net profits interests in certain natural gas producing working interest properties, owned and operated by XTO Energy, Inc. XTO Energy engages in the production and sale of oil and gas in the Hugoton area of Oklahoma and Kansas, the Anadarko Basin of western Oklahoma, and the Green River Basin of southwestern Wyoming. As of December 31, 2006, the company owned interests in 407,987 gross producing acreage of developed property, as well as in 1,212 gross oil producing wells and 45 gross gas producing wells. XTO Energy had proved reserves of 420,452 Mcf of gas and 3,838 Bbls of oil. Hugoton Royalty Trust was founded in 1998 and is based in Dallas, Texas. Hugoton Royalty Trust (NYSE:HGT) operates independently of XTO Energy Inc. as of May 12, 2006.

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