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2007issue C081-5

Reading trendline breaks in a housing-sector case

A 2007 housing-sector case shows how a rising weekly trendline on a builders composite can look like recovery while remaining a hypothesis that later price structure may reject.

  • A rising weekly trendline on a builders composite can look like the end of an industry decline while remaining a hypothesis that later price can reject.
  • The same index had already broken a mid-2000 uptrend and a head-and-shoulders neckline before the mid-July 2006 rally line was drawn.
  • The mid-2006 advance was later read as a bear-market rally after its shape, declining average volume, and a later trendline break.
  • On the same weekly chart, earnings overlays kept deteriorating while the trendline rose, so the price line and the fundamental overlay disagreed.
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What the rising weekly line could not settle

A weekly composite of 24 residential and commercial builders showed a rising trendline from mid-July 2006. Some observers treated that line as evidence the industry decline had ended.

TradersWeek editorial view: the same rising line is better read as a falsifiable hypothesis on a weekly OHLC chart. Later price structure can still reject the recovery reading.

Weekly builders composite and the 2006–07 rising line

A trader should see a long weekly advance that had already broken in spring 2006, then a mid-2006 to early-2007 rise that still looked like recovery until the March break rejected it. Index levels were read from the published weekly OHLC plot against the printed 20–82 price scale.
A trader should see a long weekly advance that had already broken in spring 2006, then a mid-2006 to early-2007 rise that still looked like recovery until the March break rejected it. Index levels were read from the published weekly OHLC plot against the printed 20–82 price scale.VectorVest Builders (residential/commercial) Index · weekly · 2002-09-20T00:00:00.000Z to 2007-03-23T00:00:00.000Z

Weekly OHLC bars were digitized from the VectorVest builders-index figure; dates follow the printed axis and the article’s dated breaks (28 Apr 2006, mid-July 2006 rally, 5 Mar 2007). Levels are approximate to a few index points. The lower-pane earnings overlays use a different scale and are omitted.

Breaks that came before the mid-July rally line

The builders index had already lost a long-term uptrend that began in mid-2000, with a decisive breach dated April 28, 2006. A head-and-shoulders neckline break followed in the third week of May 2006.

That neckline is the horizontal or gently sloped support line of a multi-year head-and-shoulders price structure. It is used here only as context around the same weekly chart that also hosts the trendline signals. Trendline breaks on the builders-index weekly chart also marked early 2006.

The mid-2006 advance as a later bear-market rally

The mid-July 2006 rally line was later shown as breached on March 5. That same mid-2006 advance was later read as a bear-market rally because its shape resembled a bearish flag or rising wedge and average volume declined while the pattern formed.

A bear-market rally is a multi-week advance inside a larger decline. It can resemble a new uptrend until the advance itself is invalidated by a later trendline break.

A rising line and a deteriorating overlay

During the July 2006 to February 2007 builders-index rally, earnings-growth, earnings-per-share, and growth-to-price-earnings lines on the same weekly chart continued to deteriorate. The rising trendline and the fundamental overlay disagreed.

Other weekly charts in the same sector tape

A weekly chart of a large homebuilder showed an April 2007 breakdown through a head-and-shoulders neckline after a structure that had been forming since mid-2003. Earnings growth turned negative only after that technical breakdown.

A weekly mortgage-lender chart showed a long-term uptrend line breached on April 2, 2007, the same period another lender formally entered bankruptcy.

Home prices as the wider backdrop

National home-price history from 1987 through the fourth quarter of 2006 was presented as a parabolic rise in which prices doubled between 1999 and 2006. That history supplied the broader price-structure backdrop for the later sector trendline tests.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
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20071-6 pp.Next on TrendlineConstructing replaceable trendlines for break signalsConstruct a trendline through two or more price points, extend it forward, and treat it as working support or resistance only while later closes stay on the correct side.
All readings on this track · 53 readings
  1. 1984Constructing the slow stochastic from a five-session range
  2. 1985Gold-proxy trendlines and a January support base
  3. 1988Construct a five-week new-highs total as a breadth chart
  4. 1988Stacked channel, trendline, and moving-average warnings in 1987
  5. 1989Auditing fifth-wave counts with equality, Fibonacci, and trendlines
  6. 1990Money-fund maturity as a companion Eurodollar chart
  7. 1990Constructing wave targets from ratios, triangles and trendlines
  8. 1992Nested time frames for trend and channel signals
  9. 1992A pre-trade checklist for trendline breaks and loss limits
  10. 1992Bond-fund timing inside trendlines, retracements, and dual averages
  11. 1992Two-point trendline construction from rise over run
  12. 1993Disposable chart ratings from confirmed level tests
  13. 1993When trend channels define fair value after dislocations
  14. 1993Valid trendline anchors for three-part reversals
  15. 1994Pairing stochastic divergence with trendline invalidation
  16. 1995Constructing measured targets after trendline breaks
  17. 1997A three-part pullback plan with RSI, Fibonacci retracements, and a tight trendline
  18. 1998Rule-based Trendline construction for testable entries
  19. 2000Constructing trendlines, breaks, and role reversal
  20. 2000Constructing speed resistance lines from trend extremes
  21. 2000Nasdaq tech cycle stages with a 15-day average and trendlines
  22. 2002Two-session candlesticks that test support, resistance, and trendlines
  23. 2002Constructing Fibonacci ratio grids from a peak and a trough
  24. 2002Evaluate trendline geometry before trusting a breakout
  25. 2002Trendline, volume, and breakout hypotheses versus cycle-end stories
  26. 2003Writing the long S&P 500 trendline and cycle junction as one hypothesis
  27. 2003A three-event trendline reversal checklist
  28. 2003Reverse-engineered Relative Strength Index price curves
  29. 2003Two-anchor trendline construction without cut-through
  30. 2004Treat a 15-minute e-mini stair-step as congestion under a daily lid
  31. 2005A 50-day average, a trendline break, and an open barrier flip
  32. 2005Matching a forty-day average to a crude trendline
  33. 2006Constructing a relative spread-strength oscillator for staged cycle confirmation
  34. 2006Constructing a log-change probability line for trend and range rules
  35. 2007Linked cross breaks as dollar-pair filters
  36. 2007A case study in support, resistance, and trendline role reversal on currency charts
  37. 2007Reading trendline breaks in a housing-sector case
  38. 2007Constructing replaceable trendlines for break signals
  39. 2007Reading trendline breaks before the mechanical signal
  40. 2007Trading choppy forex trends with channels and Fibonacci breaks
  41. 2007A stacked hypothesis from wave, trendline, ratio, and candle
  42. 2008Exit rules before entry: trendline, support, and stops
  43. 2008Capitulation headlines need trend confirmation
  44. 2008RSI divergence classes, ratio thresholds, and trendline tests
  45. 2010Support and resistance as falsifiable chart hypotheses
  46. 2012Reading a 2012 software directory as a breakout and channel case study
  47. 2013Treat a currency position as a regime, then map shared levels
  48. 2014Evaluating trendline swing size per market
  49. 2018Intermarket regime stress and the January 2018 trendline break
  50. 2018Weekly and daily Stochastic oscillator construction on a single daily chart
  51. 2018Constructing trendlines, support, and breakout targets from crowd exits
  52. 2019Trendline break and Fibonacci retracement as a falsifiable outlook check
  53. 2019Monthly S&P 500 false-break versus the decade trendline
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