IBD Virtual Meetup

Technical Analysis #1 = Trendlines

 Agenda
• Overview of the Investment Process
• Looking at Daily/Weekly Charts
• Trendlines 101
• Uptrends and downtrends
• Identifying a Change in Trend: Easy as
1-2-3
• Spotting uptrend and downtrend reversals
• Caution on Relying solely on TA
• Summary/Questions
Overview of the Investment Process
Analysis of Alternative Economies and Security
Markets

Objective: Decide how to allocate investments funds among

countries & within countries to bonds, stocks, & cash

Analysis of Alternative Industries

Objective: Based upon the economic/market

analysis, determine which industries will prosper
and which industries will suffer on a global basis
and w/in countries
Wh
at w
Analysis of Individual doi e’re
n
Companies/Stocks tod g
ay
Objective: Following the selection of the best industries,
determine which companies within these industries will
prosper and which stocks have the greatest growth/value

Determine proper/entry exit

points using technical
analysis (TA)
 Daily Chart - COH

20
DMA

200
Avg 50
DMA
Vol DMA
 Weekly Chart - COH

20
DMA

Avg 50
Vol DMA
 Trendlines 101

• A trend is the prevailing direction of price

movements within a given time period
• In an upward trend, prices rise consistently
over time interrupted only by temporary sell-
offs which do not make lower lows than the
previous sell off (vice versa for down)
• “One of the biggest mistakes made by
amateurs and professionals alike is
inconsistently defining & drawing the trendline.”
–Victor Sperandeo
 Steps to Drawing a Trendline
Based on Dow Theory and Methods of a Wall St Master

1. Select the time period of consideration

• Long term (months to years)
• Intermediate term (weeks to months)
• Short term (days to weeks)

2. For an uptrend within the period of consideration, draw a line

from the lowest low, up & to the highest minor low point
preceding the highest high so that the line does not pass
through prices in between the two low points. Extend the line
upward past the highest point. It is possible that the line will go
through highest minor high point.

4. For a downtrend within the period of consideration, draw a line

from the highest high point to the lowest minor high point
preceding the lowest low so that the line does not pass through
prices in between the two high points. Extend the line pass the
lowest high point downward.
 Uptrend

Lowest low
preceding
highest high
w/out passing
through prices

Lowest
low
 Poor Trendline

Passing
through
prices
WRONG!
 Upward Trendline in RIO

Lowest low
preceding
highest high
Lowest
w/out passing
low through prices
 Downtrend Trendline

Highest Highest high

high preceding
lowest low
w/out passing
through prices
 Charting the reversal

1. Draw the trendline as previously outlined

2. For a downtrend, draw a horizontal line
through the currently established low point.
Draw a second horizontal line through the
immediately succeeding minor high rally
3. For an uptrend, draw a horizontal line
through the currently established high
point. Draw a second horizontal line
through the immediately succeeding minor
sell off low
 Charting the Reversal—Easy as 1-2-3

1. A trendline is broken
• The prices cross a trendline drawn on the chart
2. The trendline stops making higher highs in an
uptrend (lower lows in downtrend).
• e.g., In an uptrend after a minor sell-off, prices will
rise again but fail to carry through above preceding
high or barely break the high and fail (also called a
“test” of the high)
3. Prices go above a previous short-term minor
rally high in a downtrend, or below a previous
short-term minor sell-off in an uptrend.
Downtrend Reversal

1 3

2
Uptrend Reversal

2 3
 Inv
- 16 est
Don’t Rely Solely on Technicals
Ja n or’
200
7E sB
diti
on usi
nes
sD
aily
 Summary

• Daily & Weekly Charts

• Determining the Trend: How to Draw a
Trendline
• Uptrends and downtrends
• Identifying a Change in Trend: Easy
as 1-2-3
• Spotting uptrend and downtrend reversals
• Caution on Relying solely on TA
• Questions?