Ibd Virtual Meetup Trend Lines

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

Analysis of Individual Companies/Stocks 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)

Wh at w doi e’re n tod g ay

Daily Chart - COH 20 DMA

Avg Vol

200 DMA

50 DMA

Weekly Chart - COH 20 DMA

Avg Vol

50 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 selloffs 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

Lowest low preceding highest high w/out passing through prices

Downtrend Trendline

Highest high

Highest 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

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3 2

Uptrend Reversal

1

2

3

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Don’t Rely Solely on Technicals

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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?