LINE AND SAUCER FORMATIONS

LINE AND SAUCER FORMATIONS

Lines and Saucers from the chart reader’s dream patterns. They’re easy to recognize, they’re reliable, they usually portend an extensive price move, and best of all they give the chartist plenty of time to assume a market position close to the bottom or top of the ensuing swing. They have only one major drawback: they’re rare among popular, actively traded stocks.

When a Line Formation evolves into a major bottom, it is commonly called a long base. This appears on the chart as a long sideways movement of prices within a narrow range, followed by a sudden eruption into new high ground, well above the preceding price range. Sometimes, although rarely, a line formation will form a major top, in which case it will look like one of our Western mesas, or plateaus.

The Saucer, or "rounding turn,” is closely related to the Line Formation, but has its own characteristics and may form much more quickly. (See Figure 27.) Prices forming a saucer gradually curve upward (in the case of a bottom formation) or downward (in the case of a top). The curve, of course, tips off the probable direction of the major move to come. There’s another picturesque feature. A great majority of Saucers (not quite all) develop a Handle or Platform, consisting of either a horizontal or slanted line before the main move gets underway. Perhaps the formation should be called a Saucepan, instead.

HOW IT HAPPENS

As with all valid chart patterns, these stem from typical market psychology in certain situations. For example, the Line Bottom, or "long base,” occurs when the supply of and demand for a stock are in a very stable balance. There is little trading in the stock because there has been no change in its outlook, for better or worse, and no news to draw attention to it. Stockholders see little reason to sell at the current price level, and potential buyers see little reason to buy, especially if they must bid the price up to smoke out any sellers. A breakout from this long base on increased volume probably means that something is brewing a new product, a jump in sales or profits, a merger, and this rumor or fact have produced an unusual demand for the stock. Incidentally, such breakouts are rarely accompanied by company announcements that come later. Frequently, "insiders” have been quietly adding to their holdings during the "long base” period. At any rate, someone in the know is buying, and sooner or later, the facts become known to more and more people, and the price begins to take off.

VOLUME

A tidy characteristic of the Line and Saucer formations is that the volume portion of the chart tends to follow the price. Throughout a Line or base formation, volume is always exceptionally low until the breakout into new high ground. Even then, trading may be relatively light at the outset, but it soon expands dramatically.

In a typical Saucer, on the other hand, trading slowly diminishes to a low at the turn of the formation, then gradually picks up as prices curve to complete the pattern or move to the Platform stage. The volume thus has formed a saucer itself. It may become quite active at the start of the Platform, and again at the end, as the stock breaks out of the Platform area.

At the outset, we noted that the Line and Saucer formations were easily recognizable, and we have discussed how to recognize them. Now, a mild word of caution. One should never take a pattern of any kind for granted until it is nearly completed. This applies even to so simple a formation as the Line or long base. A stock may appear to be developing one but evolve into an entirely different formation in short order.

There is an interesting variation of the base formation that deserves comment. On occasion, just before the breakout move, there will be a "shakeout,”—that is, a false swing in the opposite direction, which may "shake out” timid or ill-informed stockholders. (See Figure 28.) During this shakeout, prices drop to a new low. Then they rally through the base range and into new high ground, on high volume. Despite the weakness displayed by the brief dip, this variation can result in as great a rally as the more orthodox base formation.