Stocks move up on persistent demand(buying) or down because of relentless supply (selling) or sideways because of a close tussle between buyers & sellers. A trendline in most occasions says it all. If you observe lane discipline and travel by the sign boards, you reach your destination safe & sound. Trendlines help you reap the richest haul from the markets in a similar safe way.
A trend line is a straight line that connects two or more price points and then extends into the future to act as a line of support or resistance. The upward sloping trendline may be called a demand line as stocks bounce of that line due to a rise in demand and similarly the downward sloping trendline may be called a supply line as every time the stocks reaches that line supply comes in & prices fall. In a sideways market, the unresolved "supply & demand" gets into a tussle for supremacy which gets resolved when either demand or supply overpowers the other. As long as the larger trendline is intact, each sideways move will get resolved in favour of the main trend.
Uptrend Line(Demand line)
An uptrend line has a positive slope and is formed by connecting two or more low points. The second low must be higher than the first for the line to have a positive slope. Uptrend lines act as support and indicate that net-demand (demand less supply) is increasing even as the price rises. As long as prices remain above the trend line, the uptrend is considered solid and intact. A break below the uptrend line indicates that net-demand has weakened and a change in trend could be imminent.
Downtrend Line (Supply Line)
A downtrend line has a negative slope and is formed by connecting two or more high points. The second high must be lower than the first for the line to have a negative slope. Downtrend lines act as resistance, and indicate that net-supply (supply less demand) is increasing even as the price declines. As long as prices remain below the downtrend line, the downtrend is solid and intact. A break above the downtrend line indicates that net-supply is decreasing and that a change of trend could be imminent.
Semi-log Chart for Higher cycles(Week/Month)
High points and low points appear to line up better for trend lines when prices are displayed using a semi-log scale. This is especially true when long-term trend lines are being drawn or when there is a large change in price. Most charting programs allow users to set the scale as arithmetic or semi-log. A semi-log scale displays incremental values in percentage terms as they move up the y-axis. A move from Rs10 to Rs20 is a 100% gain, and would appear to be a much larger than a move from Rs100 to Rs110, which is only a 10% gain. The rate of ascent appears smoother on the semi-log scale. On the semi-log scale, the trend line fits all the way up.The semi-log scale reflects the percentage gain evenly, and the uptrend line was never broken till jan.08. Long term investors will do well to use this semi-log charts to maximise their gains by increasing their holding period. Smart investors will exit at the channel peak when the sentiment reading is of "Euphoria" with highest PE.
Arithmetic Chart for lower cycles(Day/Hour)
An arithmetic scale displays incremental values (5,10,15,20,25,30) evenly as they move up the y-axis. A Rs10 movement in price will look the same from Rs10 to Rs20 or from Rs100 to Rs110. On the arithmetic scale, three different trend lines were required to keep pace with the advance.
It takes two or more points to draw a trend line. The more points used to draw the trend line, the more validity attached to the support or resistance level represented by the trend line. The general rule in technical analysis is that it takes two points to draw a trend line and the third point confirms the validity.
The magic of trendlines unfold into channels when parallel lines are drawn and these channels give you often the "targets" to book out as well as "fresh entry point" as illustrated in the chart of "UNITECH".
As the steepness of a trend line increases, the validity of the support or resistance level decreases. The angle of a trend line created from such sharp moves is unlikely to offer a meaningful support or resistance level.
Combining timecycles:
As illustrated from the chart of "SAIL"- Daily & Hourly, a trendline breakdown in the lower time cycle(Hour) may be construed as a mere correction as long as the higher timecycle prices are trending up within the channel. When the price breaks down in the hour which also coincides with the likely breakdown in the daily, a critical reversal point is spotted early on and a trade could be initiated with a high potential profit with limited risk.
In EW study, trendlines play a very important role in identifying a wave(as Elliott never defined what is a wave?), the end of corrections, type of corrections, target setting coupled with fibonacci relationships and most important of all is the early warning signal of the end of the 4th wave with a small(false) break down in the trendline, thereby initiating the swift 5th wave trade which then completes the trend.
Trend lines can offer great insight to trading coupled with horizontal support and resistance levels or peak-and-trough analysis.
Trendlines are easy to apply and the trader need to be persistent as well as consistent and balanced in his approach. Highly traded stocks has highly tradeable channels. As trendlines follow only the prices, not the often distracting technical oscillators, many traders swear by it and base their trading strategies with only trendlines.
The simplest of all technical analysis, Trendlines, which effectively captures the demand & supply - the very basic of stock price behaviour, if exploited in a balanced way with tremendous amount of patience & conviction, can bring the riches beyond a trader's/ investor's imagination..Believe in it.
Get Rich Slowly.
