THE FIVE LINES

One Investor’s Application and Use of Technical Analysis | By Rob Donnelly

Introduction

As an investor and trader working to perfect his craft for over twenty-five years, I have fought to answer the enduring question of what role can or should Technical Analysis play in a fundamentally driven investment strategy. This article outlines my approach and framework.

Over the long term stock prices tend to respond to the fundamental thesis that makes for a great business - revenue growth, earnings power, management execution, and competitive durability. In the short run, stock price and behavior represents the market’s ongoing price discovery and probability analysis of the timing and strength of those fundamental drivers. The market attempts to discount future outcomes with the stock serving as a mosaic of disparate analysis, opinions, decisions, emotional states, and investor scale. The greater the number and significance of the participants in that process (i.e. institutional investors, analysts, etc) the more dynamic, meaningful, and “efficient” the price discovery process - and yet it is a process that requires time to stabilize and reach even a momentary stasis.

While the subject of fundamental stock analysis is well covered, technical analysis remains in the shadows, often ignored or treated as an obscure adjunct. Understandable given the cacophony of indicators, quant signals, and mysterious lines. The chaotic and unintelligible charting techniques promulgated by a sea of closet experts and voodoo technicians has been a clear detractor from its mainstream use. However, the footprints of behavioral finance are well documented and the technology and tools have evolved to the point that Technical Analysis warrants serious consideration and use by all investors. 

Defining My Objective

After a decade of deep dives, experimentation, and constant revision, I arrived at two conclusions: i. less is more, and ii. Technical Analysis plays a key role in trade execution and management. Not trade selection, that is the job of fundamental analysis, but rather for trade set-up, entry, and risk management. In other words, it does not answer what to trade, just how best to trade it. I call my approach The Five Lines.

Ultimately, my goal in studying Technical Analysis was to develop a process for measuring and mapping the behavioral side of financial markets. What price action forces are acting on a given stock at a given moment in time? What lies behind the price, volume and volatility? Where has it been and, more importantly, where might it be going? Recognizing that nothing in trading is even close to perfect, the objective then is to better understand and manage the probabilities in order to create a discernable edge. If you can better define the probabilities, you can better manage risk. If you can create an edge, then you have a chance at generating alpha.

While there are several factors or attributes Technical Analysis can tell us about price action, my priority centered on gaining insight into the underlying supply-demand characteristics of a particular stock. Just as the fundamental laws of economics apply to markets and business, so too do they impact stock price movement. A stock that is in limited supply (not a lot of sellers) but in great demand (enthusiastic buyers) will move up quickly - and the reverse. A stock that is relatively unknown and underfollowed often spends a lengthy period establishing a nearly flat base as the balanced entries and exits ebb and flow over a long duration. A sudden break lower in stock price due to an outsized seller that is quickly absorbed by the market and returns to prior pricing tell us something about that stock and the profile of owners behind it.

What makes financial markets one of the most interesting human and behavioral exercises in the modern world is the dynamic nature in which buyers and sellers come and go over time based on innumerable factors and motivators - some much more meaningful than others. Some based on real data and analysis, some pure emotion. Long time horizons and short. Smart money, dumb money. Institutional investors and retail. It’s an ever changing landscape that, like the sea, commands respect, a bit of reverence, and you certainly never turn your back to it.

Behavioral Finance, an entire study unto itself, attempts to create a framework for understanding the human element in trading. The punch line - it is possible to see evidence, patterns, or signatures in the price action of stocks that illuminate investor behavior in whole or in part. For example, instances where there is likely a large institutional buyer (or two) carefully accumulating stock and building a position based on the available supply so as to not cause rapid price movement. Or the signature associated with exhausted investors that capitulate their way into selling their final shares only to see supply vaporize just as the buyers lie in wait. 

Humans are emotional creatures that can be irrational as often as they are rational. Place hundreds or thousands pitted against each other in a single stock on a single day at a single hour, each armed with their own data, beliefs, and biases…and you have a behavioral finance monstrosity that can take on a life of its own. The stock market. 

Developing the Framework.

A core principal of my profile as a trader is the need for efficiency and simplicity. A streamlined path to analyze price action, set-ups, entries, and position management in real time. As a solo artist, I have no choice but to work lightly and leverage a highly curated set of tools that can be implemented effortlessly to yield actionable insights that can define an edge. Thus, I set aside the hundreds of indicators, oscillators, channels, signals, waves, and endless combinations therein, arriving at the Occam’s Razor-esq conclusion that the simplest path is likely the correct path. My focus was set on the core supply demand signatures and structures that could provide the greatest value, define key areas of support and resistance, and identify critical price levels that are relevant and meaningful to market participants. 

Over the years, I studied and learned from some of the best. Several that contributed significantly and are worthy of study include: i. Stan Weinstein's Secrets For Profiting in Bull and Bear Markets, by Stan Weinstein. 1988, ii. Diary of a Hedge Fund Manager: From the Top, to the Bottom, and Back Again, by Keith McCullough and Rich Blake, 2010, and iii. Think & Trade Like a Champion: The Secrets, Rules & Blunt Truths of a Stock Market Wizard, by Mark Minervini, 2017. The published works on Technical Analysis by Martin Pring and Marc Chaikin.

The mission centered on developing a highly curated yet insightful toolkit to serve as guide for managing trades once my fundamental analysis and diligence identified an actionable target. Again, my use of Technical Analysis is not for deciding what to buy, but rather when, and how best to manage risk along the way. The goal was to keep it to as few indicators or lines as possible, maintain hyper-efficiency, and explore ways to implement them in a unique ways in order to gain an edge. 

Similar to others, I started with Exponential Moving Average (EMA) lines yet quickly added a twist. The two input calculations for length (number of bars) I migrated to were 63 and 252 days. Why those values? They are the average number of trading days in a given quarter and calendar year. Institutions and traders are driven by those two metrics in so many ways, it only makes sense to use them as a reference. While an argument can be made for other metrics, like Fibonacci, after years of experimentation I settled on the two above. I may refer to these on occasion, but they are not a part of the core. 

In terms of chart setup, I primarily use daily bar charts with standard Open-High-Low-Close and volume bars at the base. The majority of my work is done at the daily level with weekly charts serving as a reference for the macro level view and longer term trends. In addition to the Five Lines, I will often use Chaikin Money Flow and Martin Pring’s KST as additional reference points, keeping in mind these are just that, reference data. Think of them as trade-related landmarks - they provide visual clues, do not drive any specific trading decisions. 

The good news is the above chart setup requires no custom indicators or code and even the most basic charting applications can accommodate. I have found that it is the experience and skill of the operator, not the tools, that determines success.

The Five Lines

The Five Lines are just that, five line-based indicators that are constructed and implemented with a set of gilding principals to be used in concert with subjective experience. These five serve as a framework for determining meaningful and specific price levels of key support and resistance thresholds for a given stock or security through time. For most of us, the present time is the clear priority, and gaining insight into the expectations and probabilities of future price action is the goal. 

The first four lines are based on the concept of Volume-Weighted Average Price (VWAP), which is defined as the average price of a stock weighted by the total trading volume. VWAP is used to calculate the average price of a stock over a period of time taking into consideration the volume of trades at each price. Another way to frame it, taking all of the traders and trades over a period of time, VWAP is the average trading price for the group (and therefore average basis for buyers). It can be measured for a given trading day, a defined time series, or over an extended period of time.

When VWAP is used over time with a specific starting point, it is called Anchored VWAP, the anchor serving as the starting point in the series. The key is in its implementation and knowing where to set the anchor. While there are several schools of thought and the possibilities are many, I’ve evolved to using four separate Anchored VWAP lines based on the specific trading behavior of the stock over the last 12-24 months. 

Volume and key events, such as earnings or significant news releases, are important considerations in determining exactly where to start the series as it indicates a shift in the supply-demand profile and often the subsequent character and behavior of the stock.

I start by setting the longer time frame anchor based on either the most significant trading day or moment for the stock looking back approximately 24 months (+/- 6 months). It might be a critical earnings release, news event, or other high volume day that triggered a gap or set a new defined direction for the stock. I’ll also use Chaikin Money Flow as a guide to indicate when the stock crossed into a net accumulation mode. Try to find that moment where the character changed and a new era of investor behavior emerged.

The shorter timeframe is set under the same premise but within the last quarter or two. I often anchor on a prior earnings release date (the trading day the stock price reacted) unless there is an outsized day of a significant volume or unusual event. 

The remaining two of the four anchors are placed between the long- and short-term series based on the same type of approach and criteria - volume based reaction of the stock or clear period of accumulation. If Stage Analysis is applied, one anchor could be the day that best defines the start of a new stage. If there is a significant peak or trough, I may use the high or low of that series as an anchor as well. 

In financial markets, volume and volatility are signals that market participants are actively working to determine fair market value and if a large number of buyers or an institution is accumulating, the supply-demand profile can create well-defined and documented signatures. The data and results of that moment (or series of moments) are non-trivial and warrant specific consideration.

Why VWAP vs Moving Averages?

VWAP provides the same type of perspective on trend analysis, stock price volatility, and key areas of support and resistance with one tremendous advantage - it is calculated on the actual volume-based price data for that specific stock. Setting VWAP anchors based on intentional moments and material events is far better, in my mind, than using random numbers of days or bars. Again it is tuned to that particular stock over a particular period of time. It is always the particulars that matter. Additionally, the skill developed at setting the anchor on the right day is non-trivial and, if done well, adds to the traders ability to create an edge. 

The Fifth Line Is the Critical Price

The fifth and final line is by far the hardest to define and implement. While there are some basic principles, this line is derived from experience and interpretation. It is the most dynamic of the five lines and contains elements of qualitative and subjective analysis. 

This horizontal line is essentially the key line of resistance that defines a price through which a meaningful break-out could occur and after which often serves as a retest zone for support. Keep in mind, this type of analysis is all about managing probabilities. Nothing contained herein creates anything close to certainty. The goal is to identify those price zones an investor can target to either enter a new position, or scale in or out of an existing one, with the highest probability of a particular outcome.

This horizontal line of key resistance serves not just as a critical, but the critical price threshold for a given stock at a specific moment in time (dubbed the Critical Price). It’s a price that is clearly meaningful to the market and is supported by a number of confirming signals as to its relevance. It is a price that once breached, will provide greater odds of continued upward price movement (reflective of the underlying supply-demand forces). It is a price target that is defined for only a moment in time and readjusts to new levels as price action and market behavior unfold. There are times when it is obvious and clear, and times it is not. Act accordingly.

Determining this Critical Price line is as much art and experience as it is science. It is a process of continuous refinement and while I can provide a set of guidelines and best practices that work the majority of time, it is not without a highly subjective overlay. Conflicting or imprecise data requiring real time decision making and judgement calls is to be expected. 

Basic factors for determining the Critical Price include the supply-demand signature and trading profile of a stock using data points such as daily VWAP and the closing price. A cluster of consistent daily VWAP or closing price levels is a frequent reference as is the the high of an Anchored VWAP series.

A Word on Closing Prices

Keep in mind, the closing price for a stock on a given day or week is a highly valuable data point for a number of reasons: i. trading volume is generally highest in the last hour, ii. Institutional traders often place trades into the close, including orders to execute at the close, and iii. the closing price represents the final say and reflection of market participants. This is meaningful on a daily basis and even more so on weekly where positions are held over the weekend and subject to more uncertainty. 

I consider the open, high, and low prices of the day to be less meaningful data points. The first fifteen minutes of any trading day tends to be chaotic with distorted price action caused by dynamics such as the flood of new orders and slow response of market-makers that can distort supply-demand levels and price discovery. Similarly, the high and low of the day could easily represent a single trade or order that is not efficiently priced. Ultimately, VWAP and the close are the most meaningful. 

I will, on occasion, use a Anchored VWAP as a guide for a very short term series (i.e.  a “Flag” after a gap up, or Miniverni-style Volatility Contraction Pattern (see reference above). In these cases, I’ll set the Critical Price line at the high of this short term Anchored VWAP line. 

The key is to look for clusters or consistency in daily VWAP level and closes - especially those supported by volume. This will be as much art as it is science and you will develop your style of refinement over time. There are instances where two competing Critical Price thresholds seem to emerge and you will encounter situations where the guidelines could be implemented a couple of ways. It is important to remain flexible and fluid with implementation and interpretation.

In terms of trade execution, the Five Lines, and Critical Price line in particular, serve as a guide, not a rule, for trade entry and management. Think of them as an aerial map of the stock price landscape providing context for navigating the market. As you will see over time, the gravitational pull to these areas of support and resistance is meaningful. A convergence of multiple lines can be a powerful force in defining a base or trend change. 

Concluding thoughts.

My intent is to use this summary as a starting point for publishing examples of The Five Lines and Critical Price at work. The visual application will answer a lot of questions and most readers will quickly see and understand their use across multiple cases. 

While The Five Lines serve as a framework, they are not a trading system - not even close. They are merely the tools a skilled trader can use in accordance with a well defined trading plan, risk management strategy, and extensive experience. It is critical for all traders to start by knowing themselves well, defining their own unique risk profile, and creating a clear investment strategy and trading plan. 

My goal is to follow up on this article over time with examples of my use of these tools in the hope that it helps others in their trading success. At the individual level and for a widely applicable framework such as this, trading is not a zero sum game. It is indeed possible to win alongside others and serve the community of traders with ideas and insights that help us all reach peak performance. 

It’s also important to note that this article describes only a small subset of the vastness of what it takes to be a successful investor and trader. The psychology of trading, emotional stability, experience, discipline, and mindset all supersede any other factor when it comes to achieving success in the financial markets. Any set of tools is only as good as the human that puts them to use. Invest in yourself by studying and learning from the masters.

I am truly grateful for all those who contributed to my path, and for those yet to come. 

Rob Donnelly

Disclaimer. The aforementioned is for informational and educational purposes only and does not constitute investment advice or a trading strategy. Always do your own due diligence, manage risk, and trade responsibly. 

Copyright 2025. Robert Donnelly. All Rights Reserved.