Trendlines

Technical analysis assumes that the prices of the tradable securities are trending. Trend lines are used in technical analysis for visual trend identification and trend confirmations. A trend line, which is a straight line that connects two or more price points is drawn on a chart. In many cases, trend lines are extended into the future to see possible future development of the trend.

There are two main types of trend lines in technical analysis: support lines and resistance lines. A support line is formed by drawing a line that connects two or more support points - points from which the price rebounds after a decline. A resistance line is formed by drawing a line through resistance points - points where the price plunges down after previously having been in an up-move. On the NASDAQ 100 chart below, you can see examples of both Support and Resistance lines.

Chart 1: NASDAQ 100 chart with Support and Resistance lines

Another way of classifying lines is to define them as uptrend or downtrend lines. An uptrend line is a line that has a positive slope and is drawn through support points (Support Line). A downtrend line has a negative slope and connects resistance points (Resistance Line). Examples of both uptrend and downtrend lines can be seen on the NASDAQ 100 chart below.

Chart 2: NASDAQ 100 chart with uptrend and downtrend lines

In technical analysis trend, lines are used to confirm the trend and define moments of possible trend reversals. If the price rises above the up-trend line, the price uptrend is considered to be strong and intact. As long as the price moves below the downtrend line, the price downtrend is considered to be solid and intact. When either trend line is broken (crossed by price), the trend is considered to be weak and tradable security that is being studied is considered to be ready for a reversal.

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