Tuesday, May 08, 2007

 

Respect the Trendlines


The beauty of a trending market, when you catch it, is the respect the trend shows to the trendlines established at the beginning. Today's bounce off those lines are a perfect example. As you can see the parallel trendlines in the link above bounce off two lows while the trendlines in this chart bounce off two highs. No particular reason for this other than when I established the lines with the high and low of the first leg up, a prerequisite for true trendlines, these points best contained the trend.

Trendlines are not gospel. They can be broken in a small way without ending the trend. Their usefulness is in the breaking of the trendline signals a change in trend or a large correction. As you may notice there is a larger wave up that proceeds the trend I am illustrating in this chart. It begins at Dow 11,940 and ends at 12,510. (For you Elliott Wave affionados, the prices here are wave 1 and wave 2 ends at 12,243 and the trendlines on the chart start at the end of a smaller wave 1 {12,593} and 2 {12,428}.) That larger trend and its trendlines will become important as soon as the smaller trendlines are decisively broken. For this reason I said that we could see a huge rally in the Dow and that the breaking of these smaller trendlines will only lead to a correction with higher prices to follow.

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