chart pattern trendlines

Question 1

What to be aware of when buying a stock

Answer 1

watch when trendline marks nearby overhead resistance

Question 2

Three kinds of trendlines

Answer 2

External, Internal and Curved

Question 3

What are the characteristics of external trendlines (upsloping or downsloping)

Answer 3

• Upsloping trendlines connect the valley of a rising trend
• When the price crosses the trend line, it is an indication of a possible trend change from up to down (zig-zag but still moves upwards is in trend)
• Line isn’t cut through the price, but rest along the bottom of valleys (upward) or top of peaks (downward)

Question 4

What are the characteristics of Internal trendlines

Answer 4

• Drawn to rest flat on the peaks or valleys - cutting through the price
• Used to highlight price movement best for an unusually long trend or chart pattern

Question 5

What are the characteristics of curved trendlines

Answer 5

• Highlights the price pattern
• Slices through the price
• Called the ascending and descending scallop
• Sell signal, sharp reversal follows the breakout from the parabolic or steep trend line

Question 6

What are characteristic of touch spacing

Answer 6

• Large moves come after a breakout from a trend line with widely spaced touches
• Review page 22 for the example
• Trendlines with touches spaced wider apart (about a month) perform better than the narrow spaced touches
• The more touches on a trend line, the stronger the trend

Question 7

What are the trendline lengths and timelines? Which length is the best?

Answer 7

• Short (0-3 months)
• Intermediate (3-6 months)
• Long (more than 6 months)
• Long trends outperform short ones

Question 8

What are important things to consider when it comes to trendline angles?

Answer 8

• The steeper the trend line, the worst it performs
• Upsloping trendline breakout = a close below the trend line
• Downsloping trendline breakout = a close above the trend line
• Aspect ratio = relationship between width to height of the chart

Question 9

What are important things to consider when it comes to trendlines and breakout volume

Answer 9

• Larger price decline after a breakout from an upsloping trendline if volume is trending up
• Large rise in price if breakdown from a downsloping trend line If volume is trending down

Question 10

How do you draw trendlines?

Answer 10

• If you see several peaks and or valleys that line up, draw a line across them
• When price reaches the bottom of the channel. Buy the stock, sell when it shows signs of turning at the top of the channel
• Sometimes price forms channels, bouncing side to side. Buy low end of the channel and sell high for a swing trade

Question 11

1-2-3 Trend Change Method

Answer 11

• Price below an upsloping trend line = price is no longer up
• Price below a downsloping trend line = price is no longer down

1. Draw an external trendline from the lowest valley before the highest peak and leading to the highest peak (making point 1)
2. Price should attempt to climb back to the price level of the highest peak but not exceed by much (making point 2) [example on page 28]
3. Price must close below the lowest valley between the points, marking a valley with a horizontal line (making point 3)
   - Opposite goes from downsloping trendlines

Question 12

Sample trade using trendlines

Answer 12

• The ascending wedge is a chart pattern with two trendiness that widen over time but both tilt upward

Question 13

Advanced Trendline Tactics (P 1)

Answer 13

• When price moves away from trend line, momentum is increasing
• When price moves toward trendline, momentum is decreasing
• When price rides along the trend line, the rate of change is constant
• When price pierces a downsloping trend line and makes a higher peak (second peak higher than the first) connect the two peaks with an upsloping trend line then draw a new line parallel to the original trend line starting at the low between the two peaks/ the lower trend line will show where price is likely to reverse

Question 14

Advanced Trendline Tactics (P 2)

Answer 14

• When price pierces steep trend line it often moves up at a slower rate, following a new trend line
• Expect a pullback (downward breakout) or throwback (upward breakout) after price pierces a trend line
• When price pierces a trend line, look at the prior day’s close
• For upsloping trendiness, if prior close was at or near the intraday high, the chances of a downtrend breakout is false
• If the close was near the intraday low, chances increase that the breakout is valid