Chris Rowe

Use Trendlines to Predict the Market's Next Move

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I've received a lot of basic technical analysis questions lately, especially about how to tell if a stock is going to move higher or lower, or stay flat.

So I want to cover one of the most basic, most important and, often, most overlooked concepts of technical analysis: the trendline.

Back to Basics

When charting stocks, exchange-traded funds (ETFs), futures, commodities, currencies or the market, identifying trendlines is where it all begins.

Simply stated, the trend is the direction that the market is moving in. The market's trends are characterized by a series of zigzags that resemble a series of waves with peaks and troughs. The direction of those peaks and troughs is what signifies a trend.

There are three trends:

• Uptrends
• Downtrends
• Horizontal trends

An uptrend shows a series of higher peaks (highs) and higher troughs (lows). A downtrend shows a series of lower peaks, and lower troughs.

A horizontal trend (aka, a neutral trend) shows horizontal, or equal, peaks and troughs, and reflects a period of indecision. This is also known as the consolidation phase. Stocks or indices trade sideways as the bulls and bears slug it out, and eventually the previous uptrend or downtrend continues, or moves in the opposite direction.

Relationships Among Trends

When studying charts, you'll find that there are many different trends all existing at the same time. You'll find that some trends tend to overlap each other. And you'll find trends within trends within trends.

For example, after identifying a long-term trend, you will find intermediate-term trends within it. When you zoom in, you'll find short-term trends within the intermediate trends, and so on.

Every trend is a small part of the next larger trend.