Sometimes Lines Are Just Lines

As you can see from the graph below, the market has fallen dramatically below a very solid line of support. Sell everything and hide in the root cellar until the storm passes….

lines-are-just-lines
Sell! Sell!

 

Except the market kept moving:

Oops! I sold too soon!
Oops! I sold too soon!

 

I was reading an online article written by a diehard chartist. I won’t link to it to spare him any embarrassment. He had drawn lines on charts showing how previous bull markets had topped out by dipping under diagonal lines of support (“channels”). So if those two previous markets had ended that way, and this current market was also dipping under his line of support, then…well the end is nigh!

Notice I said “his” line of support. The problem of course is that these lines are subjective. You can look at a chart and say “well obviously the line should go from here to here.” But how do actually quantify that? And if the price dips┬ásignificantly below the line and then rebounds, what do you do? Say something pithy like “well the support line was severely tested, but is still holding for now.” Really?

Or maybe you just redraw the line.

Lots of people do. Lines of support and resistance, like much about chart-based trading in general, is backward-looking and subject to hindsight. Yes the price did such and such and lined up just so. And yes in the future, a small subset of traders might actually set their buy or sell orders near one of those lines. But all the other traders could care less where you drew your line, or why. Or perhaps they drew Fibonacci lines or horizontal lines or Andrews Pitchforks (yes that’s a thing) or Gann lines (yes, also a thing) or doodled on a chart and accidentally traded that doodle. Or maybe you’re trading against a robot who doesn’t give a crap about your puny human lines of support.

Lines of support/resistance are notoriously untestable because they’re subjective. Personally, if I can’t test a theory, I won’t put my money anywhere near it. Sometimes lines are just lines.

 

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