Chart Your Way to Profits: The Online Trader's Guide to Technical Analysis with ProphetCharts, Second Edition

Chapter 8. Trendlines and Reversals

Trendlines are very basic—but very powerful—drawn objects that can be placed onto a chart. In the context of ProphetCharts, a drawn object is an item that is added to a chart to provide insight into likely future price behavior, usually by indicating support or resistance levels. You will explore a variety of drawn objects in this and coming chapters, but a solid knowledge of the use and interpretation of trendlines is essential to your success as a technical analyst.

The properties of a well-drawn trendline are as follows:

• It connects at least two points of a graph (with high points or low points), and the more points it touches, the more valid and useful the line is.

• It is never violated by prices between the starting and ending points; in other words, all of the stock prices are either below the trendline (in which case the line is resistance) or above the trendline (in which case the line is support).

A trendline's purpose depends on your position with a particular stock. If you have a position in a stock, the trendline's value is to ensure that the trend of the stock is intact (Figure 8.1), so that when the trend is violated, you exit your position as profitably as possible. If you do not have a position in a stock, the purpose of a trendline is to show you when a possible trend change has taken place so that you can consider taking a position in the stock.

Figure 8.1. This trendline, going back for years, is intact for this stock during its climb ...