Trendlines Lesson

Trendlines illustrate the direction of the market movement and provide a  primary consideration in any analysis.

Overview

Uptrends consist of a series of successively higher highs and lows.

Downtrends consist of a series of successively lower highs and lows.

The first consideration when looking at any market is the direction of the 
long term trend. Let's look at a chart of the S&P 500.

Prices can only go in three directions; up, down, and sideways. A long line
of past price ranges together gives you a pattern. There will be plenty of dips 
and bumps along the line but you should still be able to discern a general
direction up, down, or sideways. We can help spot this direction or trend by 
drawing in "trendlines".

Can you spot the trend of the S&P 500 from August 17 to October 11? Yes, it 
is in an uptrend during this time period. Drawing trendlines during an up 
trending market consists of connecting as many successive lows as possible 
(along the bottom of the price range). An up trending trendline represents major 
support for prices as long as it is not violated.

Now, let's take a look at how powerful the trendline can be. When we look at 
the S&P 500 chart below we have an uptrend trendline break. Can you spot the 
entry? Yes, it is on October 13th and look at what the market did after the 
break. It went down over 140 points.

Trendlines connecting highs can also be drawn to indicate the top of the 
established trend or channel. These trendlines indicate the major zones of 
resistance. Now we will draw a trendline from the secondary high set at the end 
of October, connecting the highs to the end of November. We have a downtrend.

The question now is when is the downtrend broken? Correct, right around 
November 28th. This move accounted for approximately 80 points.

Now, let's look at where we are today.

What do you see? I see a break of the downtrend on January 29, do you? Now 
the question is how far will the market go up? This is where you use other 
indicators. Support and resistance are the most popular but I use some 
proprietary indicators as well. I primarily use cyclical analysis. Cyclical 
analysis is a very powerful tool. Powerful enough to predict future stock market 
prices and any other traded instrument in the world. It is based on simple 
mathematics, actually known as time cycle analysis. Time cycle analysis is a 
highly logical & sophisticated trading method based on natural time cycles.