Technical chartists always assume that stock prices prices trend.
To figure out support and resistance levels, chartists draw trendlines.
A trendline, therefore, is a sloping line (that you draw) which helps you identify levels of support or resistance.
HOW TO INTERPRET TRENDLINES
a. If the price moves up and pierces the trendline, it is a bullish signal. In the figure above (RIL, 1-Day Candlesticks Chart, price adjusted for bonus), you can see that so long RIL’s price remained below the trendline, it moved in a range. But the minute it rose above the trendline (Ex Bonus 470, CB 940) it raced all the way to 533 XB (1066 CB).
Here is one more figure to chew on, a continuation of RIL’s trend. After hitting 533 XB, it fell to 409 XB, and then in October 2017, it broke out of the new trendline at around 430 XB. Then on there was no stopping it as it went on to more than double in the span of 2-3 months.
b. Here is the 1-day Candlestick chart of PFC. So long the price was above the trendline, it remained in a range. However, once it pierced 121 and fell below the trendline, it went into a free fall. Today, it’s in the 80s, a 50% fall.
c. If the stock price does not violate the trendline support or resistance, it remains in a range/trend.
If prices remain above the downward sloping line it means the stock is in a bull trend and money is chasing the stock. But when it pierces the trendline, it implies that either bulls are tired or bears have taken over or there’s some adverse development in the market or in the company.
If prices remain below the downward sloping line it means the stock is in a bear trend and supply exceeds demand. But when it crosses the trendline upwards, it implies that either bears are tired or bulls have taken over or there’s some very favorable development in the market or in the company.
VERY IMPORTANT: After the price breaks either side, up or down, do not jump into the stock. wait for one more confirmatory candle.
ALSO: Pay attention to the volumes. If the breakout is not supported by volumes, it can be a false positive.
WHO SHOULD USE TRENDLINES – INVESTOR OR TRADER?
Trendlines tend to favor investors. Though some traders do use trendlines, the general rule is that trendlines favor short-long term investors.
WHAT PERIOD TO USE WHILE DRAWING TRENDLINES?
Investors should ideally use a 1-Day or 1-Month candlestick chart to draw trendlines.
Traders typically use 15-minute-to-30-minute candlestick chart on days of extreme fluctuations. But it works best for investors.
HOW TO DRAW TRENDLINES?
A. HOW TO DRAW DOWNWARD SLOPING TRENDLINE:
You should join AT LEAST 2 candle wicks or candle bodies. My trendline touches about 5 candle wicks as you can see in the image above. This is the Tata Chemical chart. Once the stock price broke out of the trendline at 465, and was followed by a confirmatory candlestick, it flew all the way to 781.
B. HOW TO DRAW UPWARD SLOPING TRENDLINE:
It’s very similar to how you draw the downward sloping line. In the example above (JaiPrakash Associates), you can see the price has violated the trendline at 23.90, and the violation accelerated the fall. However, you also will see that a bearish engulfing candle was formed on 8-8-17, when JPA was around 27.
The bearish engulfing candlestick is also a very potent sign of an impending fall.
You can learn how to understand candlesticks by reading the following article:
Welll, that’s it. Market’s choppy these days (March 2018) so start practicing drawing trendlines if you want to catch stocks on their way up. For live charts you can always sign up for a free account at Investing.com.