The trend is the most important concept in technical analysis.
Its strength or weakness can dictate the overall direction of your favorite stock or index. Potential uptrends can be characterized by a series of higher highs. Potential downtrends can be characterized by lower lows.
Look at the NASDAQ Biotech ETF (IBB), for example.
For years, it ran higher on the heels of 80 million retiring baby boomers, newly insured Americans, new innovation, mergers and acquisitions, and heavy demand for new treatment options. The fundamentals were there. No one could argue that.
But even technical analysis presented us with a catalyst we couldn’t ignore.
This particular uptrend was characterized by higher highs, and a supportive 50-day. In fact, for six long years, that trend line remained intact.
Any one that took advantage of it stood to make a fortune.
To identify trends, we can always rely on the 50 or even 200-day moving average, but we can also do it by drawing our own lines.
Any time there are two highs or two lows a trend line can be drawn and identified. All we have to do is connect the highs or lows on the chart, and we begin to see trend. Look at the price of oil for example. Once we begin to draw our trend lines, the trend becomes apparent.
Should oil now break well above double top resistance at $46.59, it has the potential to test prior resistance in the channel at $48. Failure there, we can then argue, could send it screaming back down to potentially test $42.
With oil, though, it’s a wait and see.
Granted, there are no certainties when trading anything. But with pattern recognition, patterns begin to emerge.