Technical analysis is built on the assumption that prices trend. Trends do not last forever. They eventually change direction. Instead, prices typically decelerate; pause, and then reverse Trendlines is an important tool in technical analysis for both trend identification and confirmation. A trendline is a straight line that connects two or more price. These phases occur as investors form new expectations and by doing so; shift the security’s supply/demand lines. The changing of expectations often causes price patterns to emerge.
An up trendline has a positive slope. It is started by a bar with a higher high and higher low than the previous bar. A rising price combined with increasing demand is very bullish and shows a strong determination on the part of the buyers. As long as prices remain above the trendline, the uptrend is considered solid and intact. A break below the up trendline indicates that net-demand has weakened and a change in trend could be imminent.
A down trendline 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. Down trendlines act as resistance and indicate that net-supply (supply less demand) is increasing even as the price declines. A declining price combined with increasing supply is very bearish and shows the strong resolve of the sellers. As long as prices remain below the down trendline, the downtrend is considered solid and intact. A break above the down trendline indicates that net- supply is decreasing and a change of trend could be imminent.
It takes two or more points to draw a trendline. The more points used to draw the trendline, the more validity attached to the support or resistance level represented by the trendline.
The lows used to form an up trendline and the highs used to form a down trendline should not be too far apart, or too close together. The most suitable distance apart will depend on the timeframe, the degree of price movement and personal preferences. As the steepness of a trendline increases, the validity of the support or resistance level decreases. A steep trendline results from a sharp advance (or decline) over a brief period of time. The angle of a trendline created from such sharp moves is unlikely to offer a meaningful support or resistance level. The trendline are merely one tool for establishing, analyzing and confirming the trend. Trendlines should not be the final arbiter, but serve as a warning that a change in trend may be imminent.
Accumulation is when buyers control the market. A downtrend that stalls while volume remains high signals that accumulation is taking place. Analysts expect, at this point, that sellers have lost control to buyers, and a reversal is likely. Distributionis when sellers control the market. The signal for this trend reversal is an uptrend that stalls while volume remains high. This means buyers have lost control to sellers. A breakout is when the Accumulation Distribution changes a trend. Higher volume at peaks means that an upward breakout is more likely. Higher volume at troughs indicates a downward breakout is more likely. Analysts will use volume to confirm a breakout (upside means strong & downside means weakness.