Trendline Breaks are OK (sometimes) – Part 2

I’ve drawn the yellow line from the spot where we left off in the earlier charts. And what a difference does this chart look in comparison to the previous one which we were just discussing:

What a reversal!

I’ve circled both below: the time when BWA failed the trendline (August 2006) and retraced back to the supporting level (September 2006). Both bearish (as we expected), but what followed was an incredible reversal in sentiment. I’ve been taking a look at this chart for about a week, and I would say that it’s all the little details here that caused the bullish tsunami.

Price went straight up from September 2006. While I draw any trendline which I would trust, there are a couple of support levels that seem to be doing the trick: first in October/November 2006 and second in February/March 2007. 

It looked pretty bleak for BWA up till September 2006

It’s pretty typical to see price pullback, especially after significant bursts, like the jump in early 2007. However, what the bears got were price clusterings (rather than a withdrawal) like in November 2006 or March 2007.

It is the finer details which speak volumes to the bullish story. It all starts with a baker’s favourite number – a dozen. We already know the importance of the $12 level here – it’s the last bounce off the trendline. I can count three times where price bounces off the $12 level – in September 2005, January 2006 and September 2006.

The most influential kickstart to the bullish story was the price reversal in September 2006. An obvious exit strategy would be to close this trade as the price started to break the $12 level. But as we can see, the candlestick not only recovered but closed above $12. There’s a major psychological shift going on here. What makes this exact moment even more pronounced was the incredible spike in volume. 

The importance of the $12 support level

But, we all know that one candlestick doesn’t change a trend.  It takes a confluence of these signs.

A common technical pattern is that of a “head and shoulders” setup: two shoulders and a head. Similar to the one below:

Was exiting on the bearish reversal of the Head and Shoulders pattern the right move?

Many technically driven investors would have recognized the head and shoulders pattern forming and would have exited on the bearish reversal (representing the top of the right shoulder). The idea behind the early exit is to sell before price falls further down and eventually closing below the neckline, completing the pattern.

Of course, the head and shoulders pattern didn’t complete. This would be the second chapter of the bullish storyline.

The next bullish indicator was at the green arrow. This was where the bulls didn’t let the right shoulder form and reversed the pattern entirely. What makes this bullish indicator even more compelling was the large candlestick body, embodying the strength of the reversal. The only hope the bears had was that the volume accompanying this reversal was just average.

Strong bullish reversal on average volume

The final clue to the bullish narrative was the failure for the bears to take over. We just saw the failed head and shoulders pattern on a bullish reversal. But here, we see how the bears jump back into the game, trying, desperately, to shift the price, again! Take a look at the bearish candlestick to refute the bullish reversal. The size of the bearish candlestick was mediocre compared to the bullish bars that preceded it. The shadows on the bearish bars illustrate the lack of commitment.

And then there’s the volume. If we thought the bullish bounce was on average volume, the bearish move was on even less volume.

Bears jump back in, but on little volume

While we didn’t get too much from the trendlines, it was the price action around the $12 support level which revealed the bullish reversal on BWA.

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