Technical Indicators

Trend Line are essential visual presentation in understanding technical indicators and determining crucial points such as support and resistance. A medium to longer term uptrend or downtrend not always evolutes the same way. Looking at different charts and periods we notice that from the start of a new price move, the trend shows three possible scenarios before reaching the end of that trend:

1) No change; the price continues to move along the trend line until it breaks that trend line.

2) The price accelerates and moves far away from the trend line; you need to draw a new, steeper trend line.

3) The price decelerates and breaks the trend moderately and continues, temporarily, less steep or even flat.Of course in some longer term price moves you will find all three possibilities combined in one trend.If there’s no change in the trend, the trend line stays intact during the whole up- or down-move. When the trend line is broken, it is the start of a new trend in that specific time period. It is rather uncommon that there is no change. Medium- and long-term stock price moves will show most of the time a change in trend acceleration.

Price-trend acceleration is often a three-step process. The trend is broken after the third change in acceleration, when it has become a very sharp move up or down. When you look for price chart patterns, you will see that these changes in acceleration often are announced by a price continuation pattern.A longer-term uptrend starting with a sharp up-move will generally slow down. The price takes off with high acceleration. It is clear that this kind of sharp up-move cannot be sustained for a long period of time. In that case you will see how short-term reactions against this sharp uptrend will slow down the up-move. A longer-term flatter price channel will be formed.How do you know that the price up-move is just slowing down and not starting a move in the other direction? Do you have to close your position when this sharp trend line is broken? Because of the previously high acceleration, you should leave enough room for the price to slow down. For example, you can use a support line or a trailing stop level to allow this process.

Most of the time, a previous support level or the trailing stop will not be broken if the price continues to move higher. When price continues to move higher, but not at the beginning speed, you will be able after some time to draw a flatter trend line followed by a new steeper trend line. You then can of course, also adapt the slope from the start of the up-move to represent the new longer-term trend line.You must keep a close eye at the trend line evolution to find entry and exit points. Additionally you can use a number of special trend lines if drawing a normal trend line does not seem to work.One of those special trend lines I call an inverse or hidden trend line.

Generally a price up-move starting with a high acceleration, and next rapidly slowing down, will be the typical condition where drawing a normal uptrend line is not possible without it being broken all the time. In such a scenario, it is difficult to draw a trend line or price channel that would help you to estimate future price targets.This is where the inverse trend line comes in handy. A high pivot in the previous downtrend and a recent high pivot in the new uptrend will be good reference points for drawing the inverse trend line. In an ascending trend, the inverse trend line is drawn from price tops. In a descending trend, the inverse trend line is drawn from price bottoms. Next you can draw a parallel line with the inverse trend line and move it to the other side at the beginning of the new uptrend. This will become most probably the new uptrend acceleration and the future price channel.The inverse trend line is a good tool to find medium and longer term trends when it is not possible to draw a normal trend line in the early stage of a new trend development.

Technorati Tags: technical indicators, trend lines, trend lines charts