Follow the Trend to Profits
There is no question that even fundamental analysts use technical charts to get an understanding of where the market or a particular stock is headed. Technical analysis is the visual interpretation of markets or a particular stock. What is most useful about technical analysis is that the discipline has found many simple ways to interpret market action. One of those simple visual signals that can be viewed on a technical chart is called a trendline. A trendline in technical analysis is a straight line that connects at least two price points that can extend over a short or long period of time. An uptrend line has a positive slope, which means that the second price point must be above the first price point. It indicates more buyers than sellers even as the price moves higher. In technical analysis, a downtrend line has a negative slope, where the second point must be lower than the first point. It indicates more sellers than buyers, even as the price moves lower. Of course, as always with technical analysis, a visual helps explain the theory best:
Chart courtesy of www.StockCharts.com. The above is a technical chart of Yahoo! Inc. (NASDAQ/YHOO) from 1999. The points 1, 2, 3, and 4 are the price points from which the positive sloping uptrend line—indicated by the blue line in the technical chart—is drawn. In technical analysis terms, points 1 and 2 were enough to draw an uptrend line, which means an investor could have benefited from a continued price rise had he/she seen the development of the uptrend line and bought the stock in October.
Chart courtesy of www.StockCharts.com.
The above is a technical chart of Amazon.com, Inc. (NASDAQ/AMZN) from 1999 to 2002. Points 1, 2, 3, and 4 are the price points that are used to construct the negative sloping downtrend line, as indicated by the blue line on the technical chart. An investor, using technical analysis, could have seen the downtrend line develop from point 2, which would have saved the investor a lot of money had he/she sold. Or if an investor was shortselling, it would have been the perfect time to do so in October of 2000. As an investor can literally see from the above examples, the trendlines in technical analysis are very simple tools to use, but powerful in the results they can provide to investors. Spotting uptrend and downtrend lines in technical charts can make a huge difference in the money an investor can earn or save. Employing these technical analysis tools is extremely useful when investing.