How To Draw A Trendline And Use It To Analyze Stocks

A trendline is one of the most basic tools in technical analysis. Its extremely simple and old timers that did not have the chance to use the computers simply used a ruler and draw a trendline on their paper charts.

The Trendline is useful to:

Spot an early trend change
As subjective support and resistance

How To Draw A Trendline

There are so many ways to draw a trendline but I just keep it simple.

Connect at least 2 lows and extend it
Connect as many lows as possible

There is no best way to draw a trendline. I can show a chart to 10 different chartists and they might end up drawing different trendlines. It just doesn't matter. Try practice drawing lots of trendlines and you will soon learn which one works and which one doesn't.

In the chart of AAL above, I connected two lows and then extend it to connect as many lows as possible. That is an uptrendline. Notice how the break of the trendline point to slowing momentum and a possible change of trend.

Breaking Trendlines Hints Of Trend Changes

Whenever a stock breaks a trendline, it can be an early indication of a trend change. In the chart above, you can see how AAP broke above a downtrendline in November. The break above the trendline gave us early hints of a big move upwards.

The chart above shows a long term monthly chart of the SPY which represents the S&P 500 index. Look how breaking of trendlines warn us of major trend changes. Using this simple tool to analyze the market really does have its benefit.

Trendlines As Subjective Support And Resistance

Trendlines can also be used as subjective support and resistance. Stocks trend to bounce off their trendlines and this can be used to the trader's advantage to buy or sell stocks.

In the chart above, you can see how ABC found support at the uptrendline. Just happened that the stock was also at price support and the 50 MA and 200 MA support. When many technical concepts converge at one place, a very potent reversal can happen.