Breaking a long term downtrendline is one of the important clues to spot a trend change in a stock. A stock that breaks a long term downtrendline may be starting a new long term uptrend. Therefore, a trader or investor should pay attention to these long term downtrendlines. Learn to spot the change of long term trend by looking at when a stock trades back above the long term downtrendline.
To be considered a long term trendline, the trendline should be at least 3 months. The longer the trendline the more bullish it will be when the stock breaks above the trendline. In order to have a clear picture, we will utilize the weekly charts to spot trendlines.
A picture is worth a thousand words. Therefore, let me show you some examples of trendlines in the weekly chart. For a primer on trendlines, read How To Draw A Trendline And Use It To Analyze Stocks.
Let's take the first example in Apple. The year 2016 was not a very good year for Apple. It continued to drift lower and many people actually started to give up on Apple. Then the stock broke above a long term weekly downtrendline. You can see the line that I have drawn on the chart very clearly.
To draw a downtrendline, you just connect as many high as possible and extend it downwards. It takes some practice and patience to draw a functional trendline. So, I suggest you look at as many charts by experienced traders as possible. Ultimately there is no best way to draw a trendline. Some people may draw it a bit different from others. But the key here is to draw a trendline that is functional and able to guide the trader to make correct judgments.
In the chart above, you can see how Apple broke above its downtrendline and then shot higher. The moment the stock broke above the downtrendline, it gave us an early indication of a trend change. Remember that the trendline that this stock broke is a long term downtrendline. The stock chart is a weekly stock chart after all. Therefore, a lot of weight is given to that event compared to the breaking of a daily trendline.
As a rule, technical concepts that happen in longer time frame charts have bigger significance than shorter term timeframes. Therefore, when you see a stock breaking a weekly downtrendline, it is a bigger and more potent signal than when the stock breaks a daily downtrendline.
Now that we have gone through Apple, it is very easy to spot a trend change in other stocks. The chart above is the chart of ALL and I have connected a few rally highs. The moment it breaks above the trendline, it told us that the stock is changing trend. See how the stock shot up from there. It was not a fast climb but a slow change of trend. The stock started a new uptrend and slowly grind higher.
The weekly chart of NFLX above is another great example of how NFLX changed trend. The breaking of the downtrendline is a big hint that the stock is about to change from a sideways trend to a weekly uptrend.
Trendline analysis can also be used in major indexes. The chart of the S&P 500 above shows how valuable it is to spot a break of downtrendline. The S&P 500 index broke a downtrendline in Nov 2016 and from there the index shot higher. When a stock or index breaks a downtrendline at support area, you can actually connect a horizontal support line with the downtrendline and form some kind of triangle.
Once the S&P 500 index broke above the downtrendline, it was also actually breaking a triangle. Thus the S&P 500 shot higher a lot because it formed a continuation pattern.
Breaking a long term downtrendline is crucial and very important. It often tell us that a downtrend is ending. In the chart of GLD above, GLD broke above a long term downtrendline in early 2016. The downtrend ended and GLD rose. Some traders rely on the trendline to enter trades or exit trades.
Now that you know the importance of breaking a trendline, the next time you look at a stock, switch to the weekly timeframe and learn to spot a downtrendline. If the stock is in the process of breaking a weekly downtrendline, its time to pay attention. The odds of a trend change and a new bull market in the stock happening is very high.
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