Using Trend Lines as Part of Your Technical Analysis

Trend lines can be useful in determining pivot points in which a stock or general market may meet up with support (bottom) and resistance (top) levels. They are a tool used in "Technical Analysis" that can be a part of your Stock Trading or Investing plan.

The lines are made by connecting two or more price points to form support and resistance levels.

They can be used to confirm a continuing trend, or one that has started to reverse and help identify a possible "Breakout".

When you add support and resistance trend lines, you form a channel in which the stock price has stayed within.

This can help you determine possible future price movements within that same channel and provide price points to watch for a breakout to occur.

Support and Resistance levels are normally determined to be horizontal levels on stock charts, but the main characteristic of these levels is where the majority of buying or selling reverses. This is also a characteristic of a "Trend Line".

The first chart shown below is of DIA, which is a fund that closely corresponds to the movement of the Dow Jones Industrial Average.

The chart is displaying a 2 week timeframe shown at weekly intervals. Notice the downward trending lines, one on the top and one on the bottom. Each time the price moves close to or near these levels, it changes direction.

As the price reaches a support or resistance level, investors and traders decide whether conditions exist to justify the price being overbought or oversold. The outcome is either a continuation or a reversal of the preceding price direction .

In October 2008, you will notice that the price action went through the previous bottom line. Looking at the last four vertical bars shown on this chart, you can see that once the bottom line is broken, higher volatility occurs as noted by the wider bars. So far the prices have stayed basically below this line, bouncing off of it while investors and traders try and figure out if there is enough reason to form a reversal in the current trend and go higher.

If enough positive outlook factors come into play, a breakout will occur and the price will move back up through the line back into the channel it has been in for the last year and a half.

If the economic outlook continues to deteriorate for the coming year, the bottom trend line (support) shown quite possibly will become the new top trend line (resistance) as the market goes lower.

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Now let's take a look at an individual stock chart. I will be using a current chart of Humana as of November 1, 2008, ticker symbol "HUM" in this example.

The first chart shows a 10 day timeframe using 15 minute intervals. I have drawn lines at the high price points of this chart and the low points to show trend lines. You can see that the current trend is down for this timeframe.

Just as in the chart of DIA at the beginning of this article, the price of HUM reaches the current trend lines and cause a reversal.

If the trend were to continue, then the price of HUM over the next few days would go lower towards the bottom level possibly around $22 or $23.

The other possiblity is that a breakout will occur, possibly thrusting the price up through the current levels.

In addition to looking at the 10 day chart shown above, let's look at some different timeframes of HUM to see if further downside may in fact be possible.

The following chart is shown using a 5 day timeframe.

Notice this chart shows the same downward trend, with the possibility of further downside, or a breakout to the upside through the trend line.

The next chart we will look at will use a longer 1 year timeframe.

Again, I have added lines that confirm the downtrend that started in January 2008. The use of trend lines usually form a channel that the stock price bounces between.

On this chart I have added a horizontal line, or a "support line" in this case, as once the price broke through the line in the beginning of March 2008, the low formed a bottom support level in which traders and investors determined to be an oversold point until recently.

At the beginning of October 2008, you will see that the price broke through this support level and again recently at the end of October.

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Some possibile outcomes from looking at these charts of HUM:

1. The current set up shown is similar to the beginning of March where the price broke through the bottom trend line twice before taking a plunge further down.
2. Since we have been below the previous support level several times over the last few weeks, that support level may now be a top resistance level of around $33.00.
3. The stock may continue to trade in its current longer term channel, with a short term target of around $38.00 at the top of the channel.
4. If any good news pushes this stock up past $33.00 then the next resistance point would be the top line of around $38.00.
5. If the next President of the United States introduces policies to come into effect that increase competition between Major Health Insurers, there will likely be less pricing power for the Insurers than there is today. This should put downward pressure on the stock price from here, causing a drop below the current price.
6. Using the charts shown above for a short term outlook, any drop below the bottom line would validate a possible further downside move and any breakout through the top line would validate a possible further upside.

Because of the US Presidential Election this week, there will be a lot of uncertainty in the markets in general. Also, due to the varying possible outcomes of using trend lines by themselves, you should use other types of analysis in addition before making any final trading decisions.

Added November 9th, 2008: To see what happened to HUM during the following week of the charts above and how trend lines can be used, Read More Here:

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Here are some other pages I have to learn about various Technical Analysis methods:

• Introduction to Technical Analysis
• Trading Channeling Stocks
• Support and Resistance Levels
• Identifying a Breakout

The examples I have shown above are to make you aware of one of the many ways to perform technical analysis. Depending on your investing or trading style and plan you have in place, a combination of methods consisting of technical analysis and fundamental analysis among other things, should be used before making any decisions.

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