TRENDLINES

Trendlines are perhaps the simplest of the tools we use in the technical arsenal
and are arguably one of the most effective. Since the construction of nearly all price
patterns requires the use of trendlines, this concept is a fundamental building block of
pattern identification and interpretation.
A trendline is a straight line connecting either a series of ascending bottoms in a
rising market or the tops of a descending series of rally peaks. Those joining the lows are
called up trendlines, and those connecting the tops are referred to as down trendlines. It is
also possible to construct horizontal trendlines joining a series of identical lows or identical
highs. Typically, a down trendline is constructed by joining the final peak with the top of the
first rally, as in Figure 6.1.
 Major Technical Principle
A true trendline is a graphic way
of representing the underlying
trend.
 Ideally, an up trendline is constructed by connecting the final
low with the first bottom in the rally, as line AD in Figure 6.5.
This is called the primary trendline. In the case of a primary
trend, this would be the bear market low and the first
intermediate bottom. The example shown here offers a fairly
shallow angle of ascent. Unfortunately, the price rallies
sharply, which means that the violation develops well after
the final peak. In such situations, it is better to redraw the
line as the price moves up.
Major Technical Principle
Drawing trendlines is more a matter of common sense rather than following a set of
hard-and-fast rules.

Trendline Breaks Can Be Followed

by a Reversal or Consolidation
The completion of a price pattern can signify either:
(1) a reversal in the previous trend—in this instance, it is known as a reversal pattern;
or
(2) a resumption of the previous trend, when it is called a consolidation or
continuation pattern.
Similarly, the penetration of a trendline will result in either a reversal of that trend or
its continuation. Figure 6.6 illustrates this point from the aspect of a rising price trend.
The upward price
trend and trendline
penetration in Figure
6.7 are identical to
those in Figure 6.6, but
the action following
this warning signal is
entirely different.
A third alternative is that the price consolidates in a sideways trading range
and then advances (Figure 6.8).
Finally, it may consolidate and then reverse to the downside. This is shown in Figure 6.9.
In a rising market, a trendline penetration may occur at the time of,
or just before, the successful completion of a reversal pattern. An
example is shown in Figure 6.10.
 Figure 6.11 illustrates the same phenomenon from the aspect of a
bear market reversal. If the violation occurs simultaneously with, or just
after, the completion of a reversal pattern, the two breaks have the effect of
reinforcing each other.
Sometimes, as in Figure 6.12, the trendline violation occurs
before the completion of the pattern.
 Major Technical Principle
As a general rule, the violation of
trendlines with a sharp angle of ascent or
descent is more likely to
result in a consolidation than a reversal.
 Extended Trendlines

Figure 6.13 shows a trendline reversing its previous role as

support while the throwback move turns it into an area of resistance.

Figure 6.14 shows the same situation for a declining market.

Logarithmic (Ratio) vs. Arithmetic Scales
Scaling is an issue that is often overlooked in the technical community, but since it can
have an important influence on how trendlines can be interpreted, this is as good a place
as any to introduce this concept. There are two axes on any market chart. The x axis,
along the bottom, registers the date (except in point and figure charting), and the y axis,
the price. There are two methods of plotting the y axis: arithmetic and logarithmic. Which
one is chosen can have very important implications.

Arithmetic charts allocate a specific point or dollar amount to a given vertical

distance. Thus, in Chart 6.3, each arrow has the same vertical distance and reflects
approximately 250 points. That will be true at any price level.

A logarithmic scale, on the other hand, allocates a given percentage price move to a
specific vertical distance. In Chart 6.4, each arrow represents a move of approximately
100 percent, whether it is at lower prices or higher prices.
 Significance of Trendlines

It has been established that a break in trend

caused by the penetration of a trendline results in
either an actual trend reversal or a slowing in the
pace of the trend. Although it may not always be
possible to assess which of these alternatives will
develop, it is still important to understand the
significance of a trendline penetration; the
following guidelines should help in evaluation.
 Length of the Line

The size or length of a trend is an important factor, as

with price patterns. If a series of ascending bottoms
occurs over a 3- to 4-week span, the resulting trendline
is only of minor importance. If the trend extends over a
period of 1 to 3 years, however, its violation marks a
significant juncture point. Just remember: Big trends
result in big signals, small trends in small signals.
Number of Times the Trendline Has Been Touched or Approached

A trendline also derives its authority from the number of times it has been
touched or approached; i.e., the larger the number, the greater the
significance. This is true because a trendline represents a dynamic area of
support or resistance. Each successive “test” of the line contributes to the
importance of this support or resistance, and thus the authority of the line is
a true reflection of the underlying trend. Just remember that a close
encounter to the line (an approach) is almost as important as an actual
touching because it still reflects the line’s importance as a support or
resistance area.
 Angle of Ascent or Descent

A very sharp trend, as in Figure 6.15, is difficult to

maintain and is liable to be broken rather easily,
even by a short sideways movement. All trends
are eventually violated, but the steeper ones are
likely to be ruptured more quickly. The violation
of a particularly steep trend is not as significant as
that of a more gradual one.
 Trend Channels

So far, only the possibilities of drawing trendlines joining bottoms in

rising markets and tops in declining ones have been examined. It is also
useful to draw lines that are parallel to those basic trendlines, as
shown in Figure 6.21.

In a rising market, the parallel line known as a return trendline joins

the tops of rallies, and during declines, the return line joins the series
of bottoms (see Figure 6.22). The area between these trend
extremities is known as a trend channel.
In Figure 6.23, the violation of the return line signifies that the price advance
has begun to accelerate. In effect, the channel in Figure 6.23 represents a
rising trading range, and the trendline violation is a breakout from it.