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Rockwell Trading Trend
analysis
Price plotting is an extremely simple task. The daily bar
chart has both a vertical and horizontal axis. The vertical
axis (along the side of the chart) shows the price
scale, while the horizontal axis (along the bottom of the chart)
records calendar time. The first step in plotting a given day’s
price data is to locate the correct calendar day. This is accomplished
simply by looking at the calendar dates along the bottom
of the chart. Plot the high, low, and closing (settlement)
prices for the market. A vertical bar connects the high and
low (the range). The closing price is recorded with a horizontal
tic to the right of the bar. (Chartists mark the opening price
with a tic to the left of the bar.) Each day simply move one step
to the right. Volume is recorded with a vertical bar along the
bottom of the chart (See Figure 3-1).
Charts Are Used Primarily to Monitor Trends
Two basic premises of chart analysis are that markets trend
and that trends tend to persist. Trend analysis is really what
chart analysis is all about. Trends are characterized by a series
of peaks and troughs. An uptrend is a series of rising peaks and
troughs. A downtrend shows descending peaks and troughs.
Finally, trends are usually classified into three categories: major, secondary, and minor. A major trend lasts more than a year;
a secondary trend, from one to three months; and a minor
trend, usually a couple of weeks or less.
There are two terms that define the peaks and troughs
on the chart.A previous trough usually forms a support
level. Support is a level below the market where buying
pressure exceeds selling pressure and a decline is halted.
Resistance is marked by a previous market peak. Resistance is a
level above the market where selling pressure exceeds buying
pressure and a rally is halted (See Figure 4-1).
Support and resistance levels reverse roles once they are
decisively broken. That is to say, a broken support level under
the market becomes a resistance level above the market. A
broken resistance level over the market functions as support
below the market. The more recently the support or resistance
level has been formed, the more power it exerts on subsequent
market action. This is because many of the trades that helped
form those support and resistance levels have not been liquidated
and are more likely to influence future trading decisions
(See Figure 4-2).
The trendline is perhaps the simplest and most valuable tool
available to the chartist.An up trendline is a straight line drawn
up and to the right, connecting successive rising market bottoms.
The line is drawn in such a way that all of the price action is above the trendline.A down trendline is drawn down and
to the right, connecting the successive declining market highs.
The line is drawn in such a way that all of the price action is
below the trendline. An up trendline, for example, is drawn
when at least two rising reaction lows (or troughs) are visible.
However, while it takes two points to draw a trendline, a third
point is necessary to identify the line as a valid trend line. If
prices in an uptrend dip back down to the trendline a third
time and bounce off it, a valid up trendline is confirmed (See
Figure 4-3).
Trendlines have two major uses. They allow identification of
support and resistance levels that can be used, while a market
is trending, to initiate new positions. As a rule, the longer a
trendline has been in effect and the more times it has been tested,
the more significant it becomes. The violation of a trendline
is often the best warning of a change in trend. Channel lines are straight lines that are drawn parallel to
basic trendlines. A rising channel line would be drawn above
the price action and parallel to the basic trendline (which is
below the price action). A declining channel line would be
drawn below the price action and parallel to the down trendline
(which is above the price action). Markets often trend within
these channels. When this is the case, the chartist can use that
knowledge to great advantage by knowing in advance where
support and resistance are likely to function.
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