Tuesday’s Technical Indicator – Fan Lines

February 10, 2009 by: Chris

I was reading last night about a technical indicator that I had seen in the past, but had not really thought about recently – the Fan Indicator.

A fan is created when you pick a low or a high point and create trend lines off of a series of low or high points. A trend reversal is typically seen after the break of the third trend line in the fan. The website My Stock Market Power has a review here.

The problem can be that – as with many technical indicators – hindsight is 20/20. Take a look at the bull market run starting in 2003. Using a monthly chart, it is fairly simple to see that the third line didn’t break down until right before the October 2008 sell off.

Fan reversals take a great deal of time. One way to look at the last bull market was one large fan. It might become a habit to always be looking for the next trend line of a fan to be forming.

How about the last bear market – what did the fan lines show us? Plenty

I had to zoon out and zoom in to find the proper point to look at the fan lines. The problem was that there was a pretty good downward trend from 2000 through 2002. It was the climactic selling in 2002 that showed us the true bottoming formation.

So what do we see now? We are still not even halfway through the bottoming:

We have two of our trend lines drawn in, but we are still waiting for the third one. Patience people. There will be plenty of time to buy when the market turns around. We will have to wait for a break through this second fan line, have that break out fail and then watch the resulting trend line for an ultimate breakout.

For certain, those who want can draw any number of fan lines to make any case that they want. I happen to believe that we may not have seen the ultimate bottom yet. I try not to read charts with that preconceived notion. We could have the ultimate bottom in, and still have another fan line to be formed.

I try to let the charts tell me the story – not to have mt build a story into the charts. You will always have different people tell you different things from the same chart. And you will also sometimes have people tell you that reading charts is a waste of time.

In any case, I believe the Fan Lines can give us an indication of how far along the bottoming process we may be.

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