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Thursday, January 5, 2012

Trend Lines: Uptrend Lines And Downtrend Lines

Trend Lines – Stock Trend Lines

Trend lines connect a series of highs or lows to define and confirm a trend.  The trend may be an uptrend or a downtrend, but it will generally be identified by trend lines.  Trend lines are straight lines which are drawn along at least two relative highs or relative lows.  Trend lines may be horizontal trend lines or slanted, as is the case with rising trend lines (uptrend lines) or descending trend lines (downtrend lines).

Trend lines are often good places to initiate trading positions with a low-risk entry, because a penetration of the trend line is a break of the trend, which provides an exit signal.  The more times that price touches the trend line, the more significant and valid that trend line becomes.  When trend lines first begin to form, they may require redrawing to be sure to connect significant lows and highs, but as a trend line matures, it will rarely need to be adjusted.  The steeper a trend line’s angle, the less reliable it becomes.

Uptrend Stock – Uptrend Lines :

An uptrend occurs when a stock makes consecutive higher highs and higher lows, resulting in a price advance which trends higher.  Each relative high is above the preceding high, and each relative low is higher than the preceding low.  Uptrend lines gain more validity each time price touches but does not penetrate the uptrend line.  An uptrend remains a trend until this series of higher highs and higher lows is broken.  A downside penetration of a rising trend line is a technical sell signal, and usually the first indication that an uptrend may soon end.  An uptrend is deemed to be complete with the formation of a lower high or a lower low.

Downtrend Stock – Downtrend Lines:

A downtrend occurs when a stock or index makes consecutive lower lows and lower highs, resulting in a price decline which trends lower.  Each relative low is below the preceding low, and each relative high is below the preceding high.  Downtrend lines gain more validity each time price touches but does not penetrate the trend line.  A downtrend remains a trend until this series of lower highs and lower lows is broken.  An upside penetration of a descending trend line is a buy signal, and usually is the first indication that a downtrend may soon end.  A downtrend is deemed to be complete with the formation of a higher low or higher high.  This provides a trading opportunity to go long once a downtrend is broken.

Channeling Stock – Trading Range:

A channeling stock is a stock in a trading range with prices bound by two parallel trend lines.  The parallel trend lines connect the highs and lows, which form the area in which the stock is channeling.  The upper trend line acts as resistance, and the lower trend line acts as support.  Channeling stocks and trading ranges are the typical price action in stocks, as stocks tend to trend less than half of the time.  A stock which breaks out of a channel or trading range is often affected by the duration of the channel, the width of the channel, and the strength of the breakout.  Trading a channeling stock may mean buying support and selling resistance while waiting for a breakout to occur and a larger move to trade.

Appearance:  A channeling stock has limited movement and is bound by well-defined trading range.  There is resistance above the stock and support below.  Sellers lurk at resistance, preventing the stock from making new relative highs by selling at higher prices.  Buyers lurk at support, preventing the stock from trending lower or making new relative lows by buying at lower prices.  This leaves the stock with horizontal price action rather than an uptrend or downtrend.  The trading range may be wide or narrow, and is typically only resolved with a high-volume thrust to new relative highs or lows.

Trading Channels: 

Channeling stocks offer a variety of trading possibilities.  Some traders will buy the stock at support with a stop-loss placed below support, anticipating a move back up to the top of the channel.  Other traders will short sell the stock as it reaches the high end of the channel in anticipation of a move back down toward support, where they expect to cover the short for a profit.  Finally, breakout traders will wait patiently for the stock to break out of the channel entirely before initiating a trade, expecting the stock to resume its prior trend.  The price projection for a stock breaking out of a channel is dependent upon the characteristics of the channel as well as the intensity of the breakout.