Trend Lines for Spotting Reversals

To spot and identify a reversal point, or to confirm that reversal is about to occur, the trend line is a very valuable and important technical tool. This is a straight line drawn underneath rising support, or above falling resistance. When price turns and interrupts the line, it indicates that a reversal has begun.

An example of a trend line occurring during an uptrend was seen in the case of McDonalds, shown in Figure below. Prices continued moving upward strongly for two months. The trend line, drawn beneath the rising support, showed exactly where the uptrend ended and reversed.

[caption id="attachment_12759" align="aligncenter" width="550"]Trend line, uptrend. Trend line, uptrend.[/caption]

The opposite trend line, tracking falling resistance levels in a downtrend, is just as easy to spot and just as strong in locating or confirming a reversal and then a subsequent uptrend.

For example, the chart for Citigroup, as shown in Figure below, tracked a 20 percent price decline from about $5 down to below $4.

[caption id="attachment_12760" align="aligncenter" width="550"]Trend line: downtrend. Trend line: downtrend.[/caption]

The trend line is a strong indicator and it is easy to develop and follow. This makes it one of the best indicators around. The combination of clarity and simplicity is difficult to beat. Trend lines confirm what other indicators also seem to indicate in reversal patterns.

By Michael C. Thomsett
Michael Thomsett is a British-born American author who has written over 75 books covering investing, business and real estate topics.

Copyrighted 2020. Content published with author's permission.

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