Trendlines are a visual portrait of the market's sentiment about a stock. If the stock is trending up, the bulls are in control. If the stock is trending down, the bears have taken command. When a stock is trading in a range, the bulls and bears are fighting for control. Trendlines are straight lines that identify important support and resistance levels. Trendlines show how fast or slow a trend is changing. You can read a stock’s trendline and use the information to find potential buy and sell points.
Open your trading account and pull up a stock chart. Look at the prices and see if they are moving upward, downward or are in a channel. At least two price points must touch the line before you can draw a trendline. The trendline cannot cross through any prices. If prices are rising, draw the trendline underneath the lows. If prices are falling, draw the trendline above the price highs. If the stock is range-bound, draw a trendline above the high prices and below the low prices. At least 90 to 95 percent of the prices should be contained above or below the trendline.Step 2
Read the trendline starting with the angle. Ideally, the trendline will be rising or falling in a 30 to 45 degree angle. A trendline at a 45 degree angle or higher is not sustainable for long. A sharp rise or fall in prices is most often caused by unusually high trading volume that will return to its normal level. A 30 to 45 degree angle trendline is more likely to hold and validate the support or resistance level. A trendline that is less than 30 degrees is weak and cannot be trusted to hold.Step 3
Look for indications that the trend is changing. In an uptrend, trendlines break when prices fall below the line -- prices will retest the trendline but fail to break through. Prices begin making lower highs. In a downtrend, the trendline breaks when prices rise above the line. Prices will retest the trendline but cannot break lower, and prices begin making higher highs. The trend change is confirmed when prices touch a previous support or resistance level.Step 4
Read range-bound stock trendlines as buying and selling opportunities. When prices near a support level, you could buy stock. When prices near a resistance level, it might be time to sell. Watch for prices that break out above the resistance level or below the support level -- this could signal the start of an uptrend or downtrend.
- A trendline is validated when three or more points touch the line.
- Do not enter a trade based on trendline information alone. Add other technical indicators to confirm the trendline.
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.