As corrections develop in our still strong uptrend, such downswing lows often necessitate re-drawing or adjusting up trendlines. There are also two different types of trendlines that come into play; internal
As the sun sets in front of my Pacific ocean home, I'm redrawing and reconfiguring trendlines relevant to trading and assessing support and resistance areas. As corrections develop in the current strong uptrend, downswing lows often necessitate re-drawing or adjusting up trendlines. The same is true in dominant declines; new rally highs often require adjusting down trendlines.
Up or down trendlines can also be used to construct parallel lines through the various highs or lows that form up or down trend price channels. More on trend channels further on. First, I should describe the two 'types' of trendlines. The most important is the internal up (or down) trendline, a descriptive term coined as far as I know by former PaineWebber (now UBS) colleague, Jack Schwager, author of the Market Wizard book series.
An 'internal' trendline connects the MOST number of highs or lows. This as compared to what we could call an 'external' trendline or what is the conventional method of constructing trendlines; i.e., a line that connects ONLY 2-3 or more of the highest highs or lowest lows. These are the intraday highs or lows in the case of a Open, High, Low, Close (OHLC) or Candlestick chart; or, a line connecting just the highest or lowest Closes in the case of a line chart.
The two types of trendlines are highlighted and described on my first chart, a daily OHLC chart of the S&P 500 (SPX). This chart reflects SPX through 3/2/12. My second chart will bring the SPX daily chart up to time I'm writing this.
The downside S&P correction that developed after my first chart above pierced the (internal) SPX up trendline. However, the subsequent rally after that brief downswing, rallied back to above the prior up trendline, regaining the prior rate of advance. The last two trading sessions of the week ending 3/23/12 once again fell under this trendline. I don't necessarily try re-drawing such a well-defined up trendline as this one, rather will wait and see if prices regain this line or trend lower.
The conventional or 'external' lower up trendline is still relevant at least potentially. If there's a more substantial or deep pullback in the period ahead, we could see a pullback to this trendline, where support is suggested in the 1345-1350 area.
Weekly chart trendlines are in a way the most telling ones as they suggest areas of longer-term support or resistance. The major SPX up trendline (T1) suggests that current major support is in the low-1200 area. The steeper up trendline (T1) implied support in the 1350 area currently.
On this chart, the most well-defined up trendline was the one that got pierced after the Head & Shoulder's Top formation and subsequent sharp break of August of 2011. I don't 'erase' such a trendline as an extension of it out into the future so to speak may highlight future tough resistance; all is highlighted on my chart notes.
The extension of such a previously broken up trendline has been termed the 'kiss of death' trendline by Michael Jenkins, a well-known market commentator/analyst at one time, implying a rally killer once prices come back to that line.
Once you have an up trendline, you can easily construct an uptrend price channel by drawing a parallel line above the up trendline that touches the various rally highs as seen below with the weekly SPX chart.
There's a bit of art sometimes to constructing a trend channel. Only ONE prior high is actually enough to 'anchor' the line that's parallel to the up trendline. In the case of the daily Nasdaq Composite (COMP) chart seen next, this is the technique I've used to construct the broadest possible COMP uptrend channel.
However, there's a later and narrower uptrend channel that looks relevant also. This gives me a narrower and broader uptrend channel.
The extension of these two lines out into the future results in two potential resistances (R1 and R2) seen below. If COMP gets up to the R1 point and stalls, its an indication to exit COMP calls. If instead COMP ends up rallying to the 3200 area and stalls, it's a higher trigger point that suggests another area to sell into.
GOOD TRADING SUCCESS!