Is inflation on the wane? Accurate trend line analysis is key

IN TENNIS, if a ball is over the line, it’s out. The rules are easy to follow and rigorously applied. A similar condition applies to trend lines in a price chart. True, the penalties are not always exact as they are in tennis, but the purpose of the trend line is to define price action that may signal the end of a current trend. This is a very important function because in some cases, moves beyond the trend line may also trigger a change in monetary or fiscal policy.

There are many important differences between the lines on a tennis court and the lines on a price chart. When it comes to tennis the lines are exactly predefined. Not so on a price chart. The placement of the trend line follows well-known rules and is not a matter of personal choice. A trend line must have 3 anchor points that are clear rebound points. The purpose of the trend line is to capture the trend – no surprise there. Its purpose is also to indicate when price activity points to a change in the trend; an incorrectly plotted line will generate a false trend-change signal.

When we look at the oil price chart it’s particularly important to plot the trend line correctly as shown on the chart with lines A and B. Line A defines the uptrend and has 3 anchor points. Getting the best and most accurate fit means the line starts at the closing value of oil in April, rather than the absolute low.