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Lines Of A Different Kind: Little-Known Technical Tools, If Employed Correctly, Can Give Best Results To Investors While Making Stock Picks

There are a host of tools that market participants can make use of to pick a stock. Some of the most popular tools are stock trends, moving averages, Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), Fibonacci Retracement and Support and Resistance, among others. However, there are a few more rare gems that, although not so popular, deserve a place in our repertoire of technical tools.

SPEED RESISTANCE LINES

Developed by late Edison Gould, Speed Resistance lines are support and resistance indicators, which are based on 1/3rd and 2/3rd retracement from prominent tops or bottoms. Due to this, they are sometimes also called as 1/3-2/3 lines, which divide the price action into 3 equal parts.

Drawing Speed Resistance Lines

1. When prices are in an uptrend, speed resistance lines are created by drawing a line from the low of the uptrend to the most recent high of the same trend, i.e., draw a line from the major low to the major high. This is the first speed line.

2. Draw a vertical line down from the high point.

3. Divide this vertical line into thirds. i.e., 1/3rd of the vertical line and 2/3rd of the vertical line.

4. Draw a line from the major low to the 2/3rd point. This is your second speed line.

5. Draw a line from the major low to the 1/3rd point. This is your third speed line.

Conversely,

1. In a downtrend, speed resistance lines are created by drawing a line from the high of the downtrend to the low of the same trend, i.e., draw a line from the major high to the major low. This is the first speed line.

2. Draw a vertical line up from the low point.

3. Divide this vertical line into thirds. i.e., 1/3rd of the vertical line and 2/3rd of the vertical line.

4. Draw a line from the major high to the 1/3rd point. This is your second speed line.

5. Draw a line from the major high to the 2/3rd point. This is your third speed resistance line.

Most charting software available in the market have speed resistance lines as an indicator. But even if it is not there, it is very easy to draw the chart with a pencil on paper. Note, every time a new high occurs in an uptrend or a new low occurs in a downtrend, the speed lines must be redrawn.

Interpretation

The 2 speed lines drawn in an uptrend act as 2 possible support levels while the 2 speed lines drawn in a downtrend act as 2 possible resistance levels. The slope of the line indicates the different rates at which prices of stocks are changing.

In an uptrend, any price retracement or correction is expected to find support at the 2/3rd line. If, however, this support does not hold, prices can be expected to reach the 1/3rd line. And if the 1/3rd line also does not hold, then it can be concluded that there is enough weakness to consider a trend reversal.

Similarly, in a downtrend, the prices are expected to find resistance while trying to cross the 1/3rd level. If this is broken, then prices can go up to the 2/3rd level, and if that is also broken, then it warrants a trend reversal. Any speed line that is penetrated undergoes role reversal i.e., if a support is broken, then it becomes a resistance and vice versa.

Note: Speed resistance lines work best when used in conjunction with other indicators.

QUADRANT LINES

Quadrant lines are a series of horizontal lines, which divide the high-low price range into 4 equal sections or quadrants. First the major top and major bottom of a price move are selected. The vertical distance between this high-low is divided into 4 equal parts by 3 horizontal lines.

These 3 horizontal lines along with the other 2 horizontal lines, one at the major top and another at the major bottom, form the quadrant lines. They are a visual aid and help you see the highest, lowest, and average price during a specified period.

Construction

Say a stock has made a recent price range of 70 to 90, the total range is 90-70 = 20. Since quadrant lines divide the high-low range into 4 distinct quadrants, each quadrant size would be (High-Low)/4 = 20/4 = 5.

Interpretation

Quadrant lines serve more as a reference chart rather than a predictive chart, i.e., it serves as an instant visual reference as to where the current price is as compared to the defined high-low range. Since the quadrant lines divide the high-low range into 1/4th or 25% each section, if after an upmove the price has retraced near the first line, it means that prices have retraced almost 25%.

If the price is near the middle line, than the price has retraced almost 50%, etc. After an upmove, a retracement that goes up to the first 25% line would be considered shallow and as a zone where the price takes a breather before resuming its upmove and, hence, can be considered strong.

If the price retraces to the 75% line, the retracement would be considered extreme and there is a strong likelihood that the uptrend may be under threat and the prices may soon gravitate back towards the original low and the trend may reverse.

FIBONACCI FANS

Fibonacci fans or Fibonacci projections are support and resistance lines, which are derived by the use of Fibonacci percentages. Since we have covered Fibonacci numbers in great detail in our previous articles, we shall not delve deeper into it. Just to refresh your memory, some of the important Fibonacci percentages are 23.6%, 38.2%, 50%, 61.8%, 76.4% and 100%.

Construction Of The Fan

Construct a fibonacci fan by drawing a trendline from the lowest low to the highest high or from the highest high to the lowest low, i.e., from a trough to a peak or from a peak to a trough. A downward dotted vertical line is a line that is drawn from the highest high down to the level of the lowest low or an upward dotted vertical line from the lowest low to the level of the highest high.

Trendlines are then drawn from the first extreme point from left to right in such a way that the lines pass through the dotted vertical lines at the Fibonacci percentages of 23.6%, 38.2%, 50%, 61.8%. You may have more lines or fewer lines in the fan as per your preference of the Fibonacci percentages. For e.g., you can have a 5th line from the first extreme to the 76.4% retracement or you can have just 3 lines i.e., the 38.2%, 50%, 61.8%.

Rising Fibonacci Fan:

Fan line 1: From the lowest low to the 23.6% retracement level on the vertical line.
Fan line 2: From the lowest low to the 38.2% retracement level on the vertical line.
Fan line 3: From the lowest low to the 50% retracement level on the vertical line.
Fan line 4: From the lowest low to the 61.8% retracement level on the vertical line.

Falling Fibonacci Fan:

Fan line 1: From the highest high to the 23.6% retracement level on the vertical line.
Fan line 2: From the highest high to the 38.2% retracement level on the vertical line.
Fan line 3: From the highest high to the 50% retracement level on the vertical line.
Fan line 4: From the highest high to the 61.8% retracement level on the vertical line.

Thus, they look like a hand-held fan facing upwards in an uptrend and facing downwards in a downtrend.

Interpretation

As stated earlier, Fibonacci fan lines are support and resistance lines. If after an upmove a stock retraces and the price falls below the Fibonacci fan trendline, then it is expected to fall further until it reaches the next Fibonacci fan line where it is expected to find support. If, however, that support is broken, then the next target is the subsequent fan line. Thus, Fibonacci lines act as support lines for an uptrending market.

During a downtrend, if prices start moving up after a down move, it is expected to encounter resistance at the first Fibonacci fan line. If that line is penetrated, the prices can be expected to move up to the next Fibonacci line, where again it is expected to face resistance.

Since we should always trade in the direction of the trend, in an uptrend, one can go long when the fan line is penetrated from below keeping the next fan line as the immediate target.

However, during a downtrend, one can go short when a fib line is penetrated from above, keeping the next lower fan line as the target. The fan lines become wider as the price move in a given direction increases.

For instance, as an uptrend continues, the fan lines become wider as the vertical distance between the high and low increases and so does the distance between the Fibonacci retracement points and, hence, your targets also increase. Remember a support or resistance once broken is expected to reverse roles, i.e., a broken support will become a resistance and a broken resistance will become the next immediate support for the next leg of the move.

TIRONE LINES OR TIRONE LEVELS

Tirone lines or levels were developed by John Tirone to indicate potential support and resistance levels based on the price range over a given period of time. They not only serve as visual reference for the price action, but also as potential Buy and Sell indicators. Tirone lines can be drawn by 2 methods - the midpoint method or the mean method.

Construction

For both methods, it is imperative that you first make a note of the highest high and the lowest low during a given time period.

Midpoint Method: This method gives you 3 distinct lines.

Tirone line 1 or the Top Line: H - (H-L)/3. The lowest low of the period should be subtracted from the highest high. The resultant value should be divided by 3. And finally, the value thus arrived at should be deducted from the highest high.

Tirone line 2 or middle line: L + (H-L)/2. The lowest low of the period should be subtracted from the highest High. This resultant value should be divided by 2. And finally, this value should be added to the lowest low.

Tirone line 3 or Bottom line: L + (H-L)/3. The lowest low of the period should be subtracted from the highest high. This resultant value should be divided by 3. And finally, this value should be added to the lowest low.

Mean Method Of Calculation Of Tirone Levels

The other method of calculation of Tirone lines is the mean method and it gives rise to 5 distinct lines. The first step in this method is the calculation of Adjusted Mean.

Adjusted Mean or Third Tirone Line: H + L + C/3. Get a sum total of the highest high, the lowest low and the most recent close for the given time period. Divide this resultant value by 3. This will give you the adjusted mean. This is the third Tirone line.

First Tirone Line: H - L + Adjusted Mean. This level is derived by subtracting the lowest low for the period by the highest high and adding this value to the adjusted mean. This forms the first Tirone line.

Second Tirone Line: 2 x Adjusted Mean - Low. Deduct the lowest low from the adjusted mean and multiply this result by 2. This forms the second Tirone Line.

Fourth Tirone Line: 2 x Adjusted Mean - High. Deduct the highest high from the adjusted mean and multiply this value by 2. This gives you the 4th Tirone line.

Fifth Tirone Line: Adjusted Mean - (H-L). Subtract the low from the high and then subtract this value from the adjusted mean. This gives you the 5th Tirone line.

Interpretation

Every Tirone line is a support and resistance by itself. If a price approaches the Tirone line from above, it will find support at that level and, hence, one can initiate a Buy. If a price approaches the Tirone line from below, it will find resistance at that level and one can initiate a Sell.

If, however, the line is broken, the price can be expected to continue in the direction of the break at least until the next Tirone line is approached. If after an upmove the prices find support at the first Tirone line, the retracement is said to shallow and the upmove is strong.

But if after an upmove, the prices move back all the way to the bottom Tirone line, then the uptrend can be considered to have reversed and it can be considered a trend change.

About the Author:

Nirmal Bang Securities Pvt. Ltd. is an online share & stock trading company in India. This is one of the best trading company where you will see online share trading tips, NSE live news, Indian currency trading market, depository services, equity share market, IPO and live commodity market prices in India for stock and share trading.