Bearish Trendlines on Stock Charts

I was doing some technical analysis yesterday and came across a chart of the Chicago Mercantile Exchange (CME). While looking at it I noticed a very distinct trendline of lower highs since January of this year. I have the chart of CME below which will be a perfect example of what is known as a bearish trendline.

Bearish Trendline Example

Bearish Trendline Stock Chart Example
I removed all the extra stuff (MACD, RSI, Moving averages, Volume, etc.) from the chart so the trendline could more easily be seen. Notice how I drew the line, just a straight line connecting the lower highs of the stock.

Trendline Break

Take a look at the last day shown on the chart and you can see where the trendline has been broken by a big up day. This is a very bullish sign and a good buy point, why? Because this tells us the stock is moving on strength, and has now broken a key resistance area. You almost always want to buy into strength because it gives you the best probability of return on your investment.

So, for a stock like CME if we were to buy right here around $550, we would want to setup a stop loss somewhere back below the trendline, or about 5 - 8% below the purchase price.

More on this topic (What's this?)
CDS Too Risky for CME Trading, Key Members Say (naked capitalism, 10/23/08)
Bookkeeping: Trying CME Group (CME) for a Trade (Fund my Mutual Fund, 11/11/08)
Exchange Wars: ICE vs. CME (Competing for Customers and Capital, 6/17/07)
Read more on Chicago Mercantile Exchange Holdings, Bear market, Technical Analysis at Wikinvest

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-- Posted by Blain Reinkensmeyer on June 11, 2007 at 11:08 am --

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