Trendline analysis can help to identify potential support and resistance areas on stock charts. Not only do trendlines help identify support and resistance areas, but drawing trendlines on charts can also identify chart patterns.
Trendline analysis is very versatile as trendlines can be drawn on 5 minute charts, hourly charts, daily charts, weekly charts and even monthly charts. The time frame depends upon each investors trading strategy. A day trader may be more interested in minute and hourly charts whereas a long-term investor relies more upon weekly and monthly charts.
When drawing trendlines on a stock chart, don't be afraid to really mark it up by drawing several of them, like I did on the below 2 year daily candlestick chart for Apple. Until I get a good feel for a stock chart and its activity, I usually have up to dozen trendlines drawn on it to try and identify the true support and resistance areas.
Because of the numerous number of trendlines, being consistent with the colors can help you to analyze your chart quicker and with more confidence. To help clarify the mess of trendlines, I always use:
- green trendlines for supporting trendlines
- red trendlines for resistance trendlines
- purple channels for price gaps
This is a 2 year weekly candlestick chart for Apple (AAPL).
As you are getting started with drawing trendlines, let me provide you with one of my most helpful trendline tips. This tip is based on my years of market observations while using trendlines.
I do not like to rely on trendline convergence areas alone though. I like to supplement trendline analysis with other types of technical analysis. Methods that work well with trendline analysis are chart pattern identification and candlestick patterns. Does the information from these methods corroborate the trendline analysis? If so, there is a greater likelihood for the expected outcome of the trendline.
For example, I typically like to see a bullish reversal candlestick pattern develop on supporting trendline after a stock's share price has been pulling back. The bullish reversal candlestick pattern supplements the trendline analysis and would indicate that the stock's share price is going to bounce from the supporting trendline.
Grab your own favorite stock chart and start drawing some trendlines on it. Look for areas of convergence and analyze the activity subsequent to the convergence. If you are new to drawing trendlines, I recommend reading through the guidelines for drawing trendlines first.
Drawing Trendlines - Guidelines
Drawing trendlines on stock charts is usually done one of two ways, either using the intra-day highs and lows for the share price or just using the closing share price. The differences between these two methods will lead to slightly different support or resistance areas in the future.
Notice the slightly different placement of the trendline. This difference will grow as more time passes. It may be beneficial to use both trendline methods at once on a chart.
I have found that learning to be versatile helps me to consistently find support and resistance areas. For example, I may at times use a combination of intra-day highs/lows and closing prices for a single trendline.
Trendlines - Broken Support & Resistance
As a general rule, once a stock closes below a supporting trendline it will turn into a resistance area rather than an support area to support the stock's share price. The opposite holds true for a resistance area. Once a stock closes above a resistance area, that resistance area usually turns into a supporting area for the stock's share price.
If you look at the above chart for Apple once again, notice that just recently AAPL broke through its overhead resistance trendline. Its share price pulled back to the overhead resistance trendline one time before surging again above the $112.39 area.
Some trendline breaks are buying opportunities. Others are sell signals. If you don't know the difference, then consider joining Trendy Stock Charts. I can show you how to properly identify trendline breaks as either opportunities or risks by using other methods of technical analysis to supplement the trendline analysis.
Join Trendy Stock Charts
Performing trendline analysis by drawing trendlines is one way to increase your portfolio's returns. If you are new to trendlines, you can enter the Idea Chamber (the members-only forum) and request that I perform trendline analysis on your favorite stock! I will take the challenge and identify the true support and resistance areas for your stock's share price.
Trendlines can be drawn on charts of all companies ranging from Apple to Zolteq, and any publicly traded stock in between. So go ahead, test me with your favorite stock!
Trendline analysis is just one of the topics of discussion in the Idea Chamber. And while I like to use trendlines to identify trends, I also like to use other technical analysis methods to supplement my trendline analysis.
As a Trendy Stock Charts member, you will have access to all my premium stock articles where I use trendlines and other methods of technical analysis to identify support and resistance areas for a stock's share price.
So what are you waiting for? Your portfolio doesn't wan't to wait any longer to improve its returns. Click the button and start the process to become part of the Trendy Stock Charts team today!