Alan Hulls tutorials in technical analysis module 04

These tutorials will introduce you to the basics of technical analysis. Whilst investors may or may not
use charting as part of their decision making process, a basic understanding of it is an advantage. .

Trendlines
There are actually 3 types of trends in the Stockmarket. A sideways trend (as represented by a
support/resistance line) is where the price activity moves horizontally across a chart. An upward trend
occurs when price activity moves upward from the left of a chart to the right. A downward trend is
where price activity moves downward from left to right.

This tutorial will deal with trendlines as they apply to both upward and downward trends. Sideways
trends and support/resistance lines belong to a special category of trend and will be covered in a
separate tutorial, a little later on.

When analysing an upward or downward trend a chartist uses trendlines. Trend trading is widely
considered to be the most reliable method of trading financial markets. There is a common clich that
states The Trend is your Friend. There are traders and investors who trade against prevailing trends
and they are referred to as Contrarians.

Important Note

The construction/placement of trendlines is subjective and chartists can have differing

opinions on how they should be positioned on a chart. The method described below is the
most conventional approach employed by chartists around the world.

In an upward trend, a trendline is constructed by drawing a line that touches two or more of the most
significant lows. This line provides support to the price action and when broken by the price activity,
indicates that the trend is weakening or may be over.

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In the chart of Fosters Limited on the previous page, the trend ended when it ran into resistance at
$5.00. The chartist would place a horizontal line at $5.00 knowing that this level will be of significance
in the future.

Important Note

The more often a trendline touches the price activity; the more significant the trendline. A
Chartist will position trendlines so they are touching the price activity as many times as
possible. This can lead to a loss of objectivity by the chartist.

In a downward trend, a trendline is constructed by drawing a line that touches two or more of the
most significant highs. This line provides resistance to the price activity and when broken by the price
activity, indicates that the downward trend is weakening or may be over.

The above chart of AMP shows a very significant downward trend with the price activity touching the
trendline on 4 separate occasions. When the price activity broke out of the downward trend it began
to rise until it almost reached $18.00. Note the sideways movement of price activity just below $18.00
during April and May 1999. As the price rose back to this level, the buyers from April and May
probably came into the market and sold their holdings at the break even price.

Important Note

A break in an upward trend signals an exit as the price activity begins to move sideways or
downwards. A break in a downward trend does not signal an entry as it does not necessarily
mean that the price will go into an upward trend.

Trendlines have two significant characteristics. The gradient and time duration of the trendline tell the
chartist the strength of the trend. Thus an upward trend requires a constant supply of new bulls or
buyers to keep pushing the price higher and this can be seen as a type of energy of limited supply.
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A trend with a steep gradient is likely to exhaust its supply of bulls more quickly than a trend with a
much shallower gradient. In understanding this characteristic the chartist knows that the steeper the
trendlinethe shorter the time duration.

The above chart of National Australia Bank (NAB) is a good illustration of how a steep trend is short
lived. The supply of buyers is rapidly exhausted in a period of only 4 weeks. The price of NAB shares
continues to rise but with a more gradual rate of climb. The more sustainable trend lasted for a period
of approximately 5 months.

A common technique used for trend trading is to exit a position when the price activity closes
consecutively lower two times in a row, below the trendline. Of course the success of this technique
depends on the chartists ability to position trendlines.

Important Note

As price activity trends for a long period of time with the same rate of climb, the market builds
acceptance in the gradient of the trend. Because of this market acceptance, it is harder to
break a long lasting trend than it is to break a short lived trend. So when a long term trend
runs into a shorter term trend, the market will usually stay with the longer term trend.

Chartists were using trendlines long before personal computers existed and drawing charts by hand
was a slow and tedious task. Trendlines were relatively easy to create with a straight edged ruler or
similar device and thus trendlines are one of the oldest and simplest type of analytical tools. In the
next tutorial we will revisit the concept of points of agreement when we look at triangles.
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 Alan Hull is one of Australias leading Technical Analysts
Alan has been trading and investing in Australian
Blue Chip shares for decades and is one of
Australias most respected Technical Analysts,
Stockmarket expert and best selling author.

He has appeared on Sky Business channel and is a

keynote speaker on the seminar circuit, appearing
regularly for the AIA, ASX, ATAA, the Trading &
Investing Expo and other major investment forums.

Alan is often interviewed by financial journalists and writes articles about the
Stockmarket and investing & trading in shares. These articles appear regularly in major
publications such the ASX online newsletter and Money Magazine.

In addition to this, Alan is the best-selling author of Charting in a Nutshell, Active

Investing, Trade My Way and Invest My Way, all published by Wrightbooks.

For more on Alans services please visit his website at www.alanhull.com

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