Trendlines
Determining Market Reversals and
Continuations
Trendlines are perhaps the oldest tools known to chartists. Trendlines form
across peaks and valleys called pivot points - relative highs and lows in a
chart. As more points form along a line, it becomes more
"established". This means that, when the line is broken, it will
likely follow through with a strong move in the new direction.
Trendlines are normally
drawn across the lows for an upward trend and the highs for a downward trend.
They can be used in multiple ways to help analyze a security, but the two
most common ways are to look for trendline breaks or trendline reversals.
Trendline breaks help us
identify when a security is reversing. The better established a trendline is
(the more touches of the line by price), the more significant a decisive move
through this line is to traders. If a trendline break is accompanied with
another significant reversal pattern (turn against support or resistance, a
breakaway gap, volume climax, etc.) it is further testament to the likelihood
of a reversal in trend.
Trendline reversals help
us identify a continuation of the current trend. Once price moves to the
trendline and then reverses against it (as opposed moving through as in
trendline breaks), we can assume that the current trend will continue. Other
continuation chart patterns that identify continuation moves are
consolidations, measured (or continuation) gaps, and volume trends.
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An Upward and
Downward Trendline for CZN
Multiple touches of
the Upward Trendline for FDX helps us identify continuation moves
The well established
Upward Trend for MNY was broken decisively in mid-April
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