Chart Smarts for Value Investors—The Line for Finding the Big Turnaround By Lynn Carpenter 
You’re in the wine store looking at shelf tickets, hoping for a clue. The tag says this fine wine that is chewy with a long finish and notes of fig, vanilla and tobacco. Huh? Back in my Gallo Hearty Burgundy days, I swore they made that stuff up. As a widow and single mom, I wasn’t buying any $30 bottles of wine back then. Actually, that was so long ago that a bottle of Mateuse was still considered a nice hostess gift. Anyway, the Gallo was my good stuff. And my bad stuff. I like reds. You didn’t need a wine knife to open it. It was priced right. Well, along came Andy, a man who knows his grape and was willing to share a bottle and what he knew. Ignorant as I was about wine, it turned out that I have my sharp taste buds and sniffer. (Wine snots call that a palate.) I just needed a little practice on the wines from the shelves at the back of the store. These days, if you tell me a wine has notes of licorice or cedar it makes perfect sense to me. I can easily detect the flint in a Graves and the barnyard in a Pinot. Though I still can’t remember vintages. Chart reading is like that. Some of the features that experts find in them sound like pure baloney if you’re not an initiate. I’ve worked at it, and I still have a nagging paranoia that the guys who see meaning in head and shoulders tops or Elliot Waves are laughing at me for believing their guff. Even though I know it’s not a hoax. I think. On the other hand, I can interpret Bollinger bands six ways. I even do Bollinger-box point and figure charts—which is incredibly arcane of me. There are hundreds of chart-reading tools, and you don’t need most of them. Some of them will make no sense to you now or ever. We’re all like that, some chart tools will speak to us, some won’t. But that’s why I started this chart reading for investors’ series with the simplest of visual tools—trend lines. INTERNAL ENDORSEMENT Winners Cherry Pick!
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| Some of us are visually inclined, some of us tend to be aural and respond to spoken hints, and some are kinetic—the learn-by-doing folks who understand things better after they put their hand to it, I’m one of those. Charts are visual, but even if that’s not your favored mode, almost everyone “gets” trend lines once the basics are explained. They are powerful, but not mystical. You can put your ruler on the chart, connect the dots and get it done. No consulting with spirit guides, standing on your head while looking at patterns or multiplying by pi is required. And each of the four trend lines is good for a different purpose. Know this little bit about chart reading and you’ll know quite a lot. So far, we’ve done the two support varieties of trend lines. Today we start with the resistance lines, beginning with the bear variety. Looking for a “buy low” opportunity or a turnaround stock that’s likely to work? The bear resistance line is the tool to know. Let’s take our first chart: 
With perfect hindsight, I can see that when Cross Country rose from $11 to almost $13 in late January it was not yet a turnaround. Unfortunately, we don’t get a preview of tomorrow, so in January, you have to rely on what’s shown to you so far. The good news is that it was enough information to guess the stock would falter again—even though a $2 move is a big one for an $11 stock. You knew it wasn’t yet a breakout to be trusted because you could connect the October and December peaks to set up the bear resistance line. No matter how much a stock goes up, when it’s still below bear resistance, it’s still bearish. Now advance your magical time machine. It’s March 2008. You’re looking at the chart again, and you still can’t see what is going to happen in April, May or June yet. But you can see that your nice, sturdy bear resistance line was soundly broken. That looks like the start of a genuine turnaround. Oooo. So simple. But I have to throw in a little caution here. There’s a reason I put the bear resistance line after the two support lines we covered earlier. It’s a little flaky. A little less reliable. The instinct among investors is strongly biased toward buying something. So bear resistance lines are often broken when they are still young. Sometimes, you have to re-draw them to get a good line. Look at the Russell 1000 Value iShares chart for a case of this. 
You could have started drawing a bear trend resistance line as I did with the dotted line on Russell iShares chart by connecting the two October peaks. But by late November, that line had been broken. The second line connecting the October and December peaks has proved to be more reliable. You can see that the stock rose toward it four more times so far and turned back. This is a line to trust. It has a good “fit” meaning prices touch it or come close more than the two times needed to set the line up in the first place. It is also less steep than the dotted line. A more gentle bear resistance line tends to last longer. Steep sell-offs invite bargain hunters, and steep resistance lines, thus, tend to get broken more quickly. But if you are about to throw your hands up and declare, “now she’s done it—and I don’t think wine tastes like licorice, either; it’s all gibberish,” pause. That first line was not a mistake. It too had a value. Some lines only measure short-term trends, and the first one was one of those. Lines that connect two such close peaks are always on probation, so to speak. Even so, a trader could have made good use of it. To the long-term investor, a stock that rose from about $78 at the breakout to $84.50 was not much of a find. But to a trader, it’s fast money. Especially if he can leverage a move like that with a nice option play. But for you, as an investor with a longer viewpoint, the “less worthy” line has some additional value. Notice what happened after the line was broken and prices went above it. Its life as bear resistance is over, but it still has some power. If you extend that first “failed” line out, it plays a new role keeping prices up. Now the stock tends to fall to that dotted line and go back up. Only one extreme movement has punctuated it so far, and that breach was quickly repaired. As technical traders say, “bear resistance has become bear support.” Now there’s a phrase you can borrow if you want to show off. Now, since this bear resistance thing is a more difficult line to handle, let’s take one more example to show a nice breakout—this is what you want to find if you are considering getting into a fallen stock that you think is due to recover. It sure beats saying “How low can it go? It’s already down 50%.” 
In this case, we’ll say that you get around to looking at a Budweiser chart at the end of 2005. I’m using a weekly price chart here, which is especially good for interpreting longer-term trends. A strong and reliable bear resistance line is well established by the start of 2005, so you don’t have to worry that this one is going to fail quickly. In March 2006, finally, there seems to be a breakout, though no big move. Still, if you’d bought, prices stayed close to the line, even on the breakout, so you would have done fine. Just a little reaction to ride out.
If you had waited for the stronger breakout in late-April to early-March, you really hit it right. The breakout came at $41. The stock eventually went to $55. By the way, Warren Buffett didn’t hit the low or catch the breakout. He bought his shares in 2005. See what timing can do when you combine it with fundamentals and value? So to sum up bear resistance: Use it on a falling stock to determine how much lower it’s trending. It also will tell you when a formerly bearish stock that is showing a little flashy rising action is all style, no substance —any stock below a bear resistance trend line is bearish. But best of all, watch for a breakout through a well-established bear resistance line—that’s the kind of action that’s likely to signal a big move and a real turnaround from bear to bull. Respectfully, Lynn Carpenter P.S. To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com. Dip, Di-Dip, Di-Dippy News of the Week By Lynn Carpenter From Dow Jones Newswire on Tuesday: “Shares of Lehman (LEH) added 12% after the company announced plans to offer $4 billion in convertible preferred shares.” Analysts are crowing happily at this news. Let me see if I get this right. A week ago, Lehman was running around reassuring everyone it had enough cash to stay in business. Not exactly high cotton. Investors are worried about a bank run, and insiders think it might be too small to qualify for a Fed bailout should it fail. On top of this, claims that nasty short-sellers are spreading false rumors are making rounds—the company denies the rumors, but they persist, and the company has not showed anything strong enough to stop them cold. This sale of preferred stock was supposed to raise capital to put the rumors to rest and show how strong the company is. But why does it need this new massive new capital transfusion this very moment, and at such high cost, if it really doesn’t have a money shortage, as it claims? The company has cut employees by almost 20% already—which hardly signals growth going the right way, does it? It got into trouble with debt, too. It just wrote down $1.8 billion in bad mortgage assets in its recent quarter. If it does that again, everything it raised in the convertible sale will be eaten up by the write-offs. The preferreds carry a 7.25% yield, which will cost the company an extra $290 million a year to pay. When converted to regular shares, they stand to dilute earnings per share by about 15%. All I can think is that analysts who stand too close to Lehman’s shadow on Wall Street need to step back for a bit of light. INTERNAL ENDORSEMENT Stock Market Shocker: How a Bunch of 5th Graders Made Fools of the Trading Elite…! Wall Street wants you to believe that you have to entrust your money with the professionals and all their skills, resources and systems, if you want to make money in the markets. It’s what these guys do for a living! How could you possibly beat them?! Nothing could be further from the truth. In fact, I have used an embarrassingly simple secret to make $15,048 in just 30 days... and boost my overall account balance 152% in less than a year. Keep reading to learn how you
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