Tips on Technicals - Speed Lines
Indicator type: |
Trend Finder |
Used to: |
Identify sustainable market moves |
Markets: |
All cash and futures, not options |
Works Best: |
Trending markets, all time frames |
Formula: |
N/A |
Parameters: |
N/A |
Theory: |
A line is drawn from the end-point of a move vertically to the price level of the start. This line is divided into thirds. Three lines are then drawn from the start of the move -- to the end-point, through the one third mark and through the two thirds mark.
Speed lines combine simple trend lines with Fibonacci-like retracement values to create market sensitive zones of support and resistance. They illustrate the recurrence of the number three in technical analysis as they divide the height of a market move into thirds. Trend lines drawn through these levels provide support and resistance.
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Interpretation: |
These lines are different from regular trend lines as they are not drawn to support or resist a move but rather in relation to the end-points of the move.
Speed lines are not restricted to skimming the tops or bottoms of price action like regular trend lines. They can and often do draw through price action and this does not diminish their value. Keep in mind that this apparent trend line violation is based on a line drawn well after the apparent break and on an extreme price that had not yet occurred. Speed lines are used for price projection, not historical analysis.
The simple rule for speed line analysis is that if a market breaks its 1/3 line, it will likely trade to the 2/3 line and be resisted (or supported) there. If it breaks the 2/3 line, the next price target is the start of the original move. This is a 100% retracement and is also a Fibonacci level.
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The chart above shows a 200 day daily bar for Dollar-Yen. A renewed downtrend got underway in early January so a trend line is drawn from the start of the decline to the lowest low for the move (19 April).
The vertical height of the January to April decline is then divided into thirds1. In this case, the total vertical height is 20.7. This yields prices coordinates of 86.68 and 93.58 on the date of the extreme low price (19 April). Lines drawn from the start of the decline through each of these two points are the speed lines for this market move.
Note that the 1/3 speed line (the lower line for a downtrend) served as the breakout point for the early May rally (A) and the successfully tested support level for the late May retracement (B). The 2/3 line serves as a resistance for the July rally.
1 It is possible to substitute Fibonacci levels of 31.8% and 68.2% instead of 33% and 67% but the difference is negligible for all but the most mathematically oriented analysts.