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Technical analysis is built on the assumption that prices trend. A trendline 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.
Figure 4.17: Uptrend and downtrend lines.
An uptrend line (figure 4.17) has a positive slope and is formed by connecting two or more low points. Uptrend lines act as support. As long as closing prices remain above the trendline, the uptrend is intact.
A break below the uptrend line indicates a change in trend for the period being considered. In LOCKIT a stock price closing below the uptrend line is a selling signal.
A downtrend line (figure 4.17) has a negative slope and is formed by connecting two or more high points. Downtrend lines act as resistance. As long as closing prices remain below the downtrend line, LOCKIT considers the downtrend intact.
A break above the downtrend line indicates a change of trend for the period being considered. A price closing above the downtrend line is a buying signal.
One or more big up or down bars at a reversal point (figure 4.18) may be the reason that it is difficult to draw a new trendline from the highest or lowest point.
Figure 4.18: Trendline with big bar at the reversal point.
In the chart, you mostly will see a sharp V-pattern or, at least, that the last up- or down-move was very big, eventually with a bigger window (figure 4.19).
Ninety-nine percent of the time, the move that follows will not be as steep as the new trend start.
In these circumstances, the new downtrend or uptrend line will have to start with one of the previous or following bars, or at some previous support or resistance level.
A 20 period’s exponential moving average or a last pitchfork is generally a good indication for the expected trendline inclination.
Figure 4.19: V-reversal pattern.