Technical Level

The technical level also divides into two phases. The first is used to filter equities. You want to be sure the list of companies you have labeled bullish are in an uptrend or bullish reversal pattern. You want to be sure the list of companies you have labeled bearish in a downtrend or bearish reversal pattern. This requires studying technical analysis. If they’re not, either wait or scrap the idea.

For longs, you want to see equities in an active current uptrend. Uptrends consist of higher highs, higher lows, and rising volume on each upward swing. If you do not see a current uptrend, a bullish reversal pattern is also sufficient, but only enter once the bullish pattern has completed and price has begun moving upwards in a new uptrend.

For shorts, you want to see equities in an active current downtrend. Downtrends consist of lower lows, lower highs, and rising volume on each downward swing. In the absence of a downtrend, a bearish reversal pattern is sufficient, but only enter once the bearish pattern is done and price begins moving in a downtrend.

Patterns below with an (R) stand for Reversal. Patterns with a (C) stand for continuation. A continuation pattern occurs in the middle of a trend.

Note that this requires drawing support, resistance, and potentially channel lines. As a quick introduction, a resistance trend line is the red line on the top of the price formation. When the price reaches a resistance trend line it usually reverses downwards, even if it first pierces the line and then moves back below. Thus a resistance line requires a minimum of two price peaks to be drawn. The line does not have to be horizontal or slope down. They can also slope upwards. A third touch of the line confirms the trendline, which is considered as “valid” until price breaks the line and remains above it.

A support line is conceptually inverted. When price reaches a support line it usually reverses upwards, but can fall below the line and rise back above. These are drawn below price troughs, and requires two troughs to draw the line and a third touch and reverse to confirm. Price should preferably stay close above the line. These lines can also be horizontal, down sloping, or up sloping while rising. Support lines are considered valid until price breaks and remains below the line while falling.

An important note should be made that support and resistance areas aren’t really levels. They are more accurate when they are considered zones. Price can reverse near the line, beyond the line, or at the line. Typically, price will pierce and then reverse and respect the line later than you anticipated. If drawing a horizontal line, it’s often better to draw the area using a rectangle instead of a line.

A channel occurs when the support and resistance lines are parallel and slope upwards or downwards. The price will bounce between the top line and bottom line repeatedly until it either breaks. If it breaks to the bottom of an uptrend channel and moves downwards or horizontally, the channel is invalidated. If it breaks to the top of an uptrend channel, there is the possibility that price will continue to respect the channel if it re-enters. If it breaks to the top of a downtrend channel and moves upwards or horizontally, the channel is invalidated. If it breaks to the bottom, it might resume trending in the channel later if it re-enters.

Make sure your long candidates are in uptrends or bullish patterns. Be sure your short candidates are in downtrends or bearish patterns. Never switch a long or short candidate’s direction based on technicals. When technicals fight against fundamentals, fundamentals usually win the war.