Trendlines

The whole section turns on one pairing that is easy to flip under pressure: which line goes under the lows and which goes over the highs. Lock that first.

Uptrend Line

An uptrend line is drawn under the rising reaction lows of an advancing market.

• It connects a series of higher lows into an upward-sloping line.
• That line acts as support: as price pulls back down toward the line, buyers are expected to step in and hold it.
• As long as price stays above the line, the uptrend is considered intact.

Downtrend Line

A downtrend line is drawn over the falling rally highs of a declining market.

• It connects a series of lower highs into a downward-sloping line.
• That line acts as resistance: as price rallies up toward the line, sellers are expected to cap the advance.
• As long as price stays below the line, the downtrend is considered intact.

Think of it this way: you build a trendline along whichever edge the crowd keeps bumping into. In a rise, the crowd keeps bouncing up off the lows, so the line lives underneath as a floor. In a decline, the crowd keeps getting turned back at the highs, so the line lives on top as a ceiling.

Exam Tip: Gotchas

• Uptrend line = under the lows = support. Downtrend line = over the highs = resistance. A common trap swaps them (drawing the uptrend line across the highs). Lows support the rise; highs cap the decline.

When a Trendline Breaks

A decisive break of a trendline (price closing clearly through it) warns that the current trend may be ending and a possible reversal is underway.

• The more times a trendline has been touched and held, the more significant a break of it is considered.
• A break of an uptrend line's support, or of a downtrend line's resistance, is the signal that the prevailing trend may be turning.

Exam Tip: Gotchas

• A trendline break is a warning of a possible reversal, not a guarantee. It flags that the trend may be turning. And a line that held many times makes its eventual break more meaningful, not less.