By Griffin Cooper
At the heart of technical analysis is the study of trends in price action. More specifically, we could say that the goal of technical analysis is to spot and identify trends and trend reversals in price action. It sounds simple enough in principle. But like many things in trading and the financial markets, it’s not as easy as it sounds. With so many indicators and methods of studying price action we can be susceptible to too much information which leads to analysis paralysis. Add this to the fact that the markets have lots of noise compared to their clear signals and we have a recipe for lots of ambiguity and confusion.
But what if we could reduce price action and all its vicissitudes to one line that we could call the ‘best fit’? And with that line, we could easily see the direction price is clearly moving. We would be able to clearly identify when prices were moving up, moving down or moving sideways.
This is precisely what we do in the Owl Group following Dr. Ken Long’s style of trading when we use the 10-Period Linear Regression Line (dubbed the “RL10” for brevity’s sake). We know we’re going to be susceptible to all sorts of heuristics and biases in analyzing price information, so why not have a highly effective and efficient and robust single indicator we can apply to any timeframe and financial instrument.
When we apply the RL10 to a chart, we can quickly see its usefulness. By applying this single, simple indicator, we can clearly see when price is trending and when the trend reversals occur. All we need to do is look at the direction the RL10 is heading. Is it going up? Uptrend! Down? Downtrend. It’s great at filtering out the noise of false moves, large wicks and other noisy behavior to give a true direction to price.
Chart A
If we look at chart A we see a weekly bar chart of SPY, the ETF for the S&P500. We look at SPY on a variety of timeframes to assess the overall health of the overall market. Here we see in Box 1 the recent uptrend in price starting in late 2023. The RL10 was pointing up throughout the whole move, clearly showing us the uptrend that was in full swing.
When trend reversals occur, the RL10 has a nice sharp turn in direction that is easy to spot as well. If we look at chart A again at Box 2, we see the swing low that formed in October 2023. This time the RL10 identified the trend reversal when it sharply reversed direction making a sharp turn from down to up to signal the start of the new uptrend.
Finally, on the right-hand side of the chart we see the recent sharp selloff that happened over the last four weeks. Again, the RL10 quickly signaled that leg of the extended uptrend, at Box 3, showing us the move was over and it was a good time to protect profits.
Of course, the actual bid/ask price is the final arbiter when it’s time to put on a trade. But the RL10 line is a highly effective indicator for helping spot trends and trend reversals. For more good stuff, visit Ablewaytech.com and Tortoisecapital.net.
Happy Trading!