In a another section you learnt that the 4 phases of a stock’s cycle are Accumulation, Ascent, Distribution and Descent. But a stock will rarely follow this neat pattern. You can see that the example below followed a Descent, Accumulation then Descent pattern. Often a stock will fall hard because of market conditions then rebound because it is still a strong company and is capable of outperforming the market. In this case you will find a Descent / Ascent pattern that completely bypasses the Accumulation phase. When this occurs, it typically won’t match the higher trough, higher peak pattern for a basic uptrend. And there won’t be 2 or more peaks to line up in a horizontal line with. So how do you find a buy signal when this happens? The answer to this is found by drawing sloping support and resistance lines.

The 45% loss you see in the above chart is the tail end of the down trend for this stock as the price had been as high as $3.80. You can see this stock goes from a Descent phase directly into an Ascent phase. The rate of loss certainly slowed up at the end, but there was no definite sideways ranging action typical of the Accumulation phase.

To draw a resistance line in the descent phase, you line up as many peaks as possible. It is always a matter of personal opinion where such a line will go, but it should look something like this –

Whereas we had previously drawn flat support and resistance lines, this one is now on an angle. This is a far better representation of the downtrend than any flat line that we could draw. As shown in the last section, once the price penetrates above this line, then an uptrend has been confirmed.

We can however give a further confirmation that an uptrend has started. Recall that a downtrend requires lower peaks. If the price breaks through the red support line AND rises above the last peak, then you have 2 confirmation points that a new trend has formed.

When you have a price breaking up through resistance and making a new higher peak, then you have a strong BUY signal.