The Visual Investor: How to Spot Market Trends, Second Edition

CHAPTER 2

The Trend Is Your Friend

As we stated at the outset, markets trend. They usually move in a specific direction, either up or down. There are periods when a market will move sideways for a while in an apparently trendless fashion. Such cases represent interim periods of indecision, but are still important. Sideways movements are often nothing more than a pause in the existing trend, after which the prior trend resumes. At other times, a sideways movement can signal an important reversal of the trend in progress. It’s important to be able to tell the difference between the two. But first, let’s define just what a trend is and provide some guidelines for determining when a trend is in motion, when it is likely to continue, and when it is likely to reverse.

WHAT IS A TREND?

Since our primary task in visual analysis is the study of trend, we need to explain just what a trend is. Simply put, trend represents the direction a market is moving. It’s important to recognize that no market moves in a straight line. If we observe the bull market in stocks that begin in 2003, it is easy to spot several periods of downward correction or sideways consolidation in the bull trend (see Figure 2.1). An uptrend is most often represented by a series of rising peaks (highs) and troughs (lows). As long as each succeeding peak is higher than the prior peak, and as long as each successive trough is higher than the preceding trough, the uptrend remains intact (see Figure 2.2). Any failure to ...