Since 2009, the S&P500 – the trendsetter for shares the world over – has been moving in an upward trend. There were dips every now and again, but the main trend was upward. A nuclear threat appears to be insufficient to cause the trend to turn.
This positive course notwithstanding, many investors are (too) nervous and choose cash or short positions. A short position is interesting when you wish to temporarily freeze your long position in shares. An uncovered short position in an upward trend is fatal and very depressing. (Long) investors celebrate with every rise.
This is why this contribution discusses one of the principles on which technical analysis is built.
There are three directions to be discerned in price movement:
According to the principles of the DOW theory (publication by Robert Rhea in 1932), these can be regarded as the primary trend, secondary trend, and minor trend.
The primary trend or “MAJOR-TREND“
The secondary trend or “SECONDARY-TREND“
The minor trend or MINOR-TREND
The goal of the investor is to recognize the profitable trend at the earliest moment, and to later discover the end or the turn of the trend as soon as possible. The turn of an important trend generally shows itself as the build of a turning formation, such as a double top.
The trend is an important given for every investor, which is emphasized by two market sayings:
The trend is your friend
Never fight the trend
A support line is a straight line that connects pronounced bottoms to each other. A resistance line is a straight line that connects a number of clear tops to each other. During a boom, the support line is the most important; during a baisse, this goes for the resistance line. The first signal to sell in a boom is when the support line is broken through; the first signal to buy in a baisse is when the resistance line is broken through. Support and resistance levels can be diagonal and horizontal.
The tops that are shaped by the intermediate increase waves during a boom are often less even. Sometimes, they can be connected by a certain line, but generally they vary in height.
The bottoms that are formed during a baisse are also not always on a straight line.
So, there are two trend lines: one line that points upward, which connects the bottoms of the consecutive smaller increase waves, and a line that points downward over the tops of the consecutive smaller decrease waves. Both lines are the main trend lines (“basic trend lines”).
In order to pull a decreasing trend we have to have at least two upper turning points (“minor tops”).
Conversely, to do this for an increasing trend, we have to have at least two “minor bottoms”.
The reliability of a trend line depends on the following factors:
A fter a breakthrough, it is often established that the prices will continue along its earlier trend. This is referred to as a ‘failure’. Keep in mind that nobody will stop you from getting into the market at that point! This small loss as a result of market costs and price difference is easily forgotten when the prices quote higher.
