Page 183 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes Trend Lengths

Along with these three trend directions, there are three trend classifications. A trend of any
direction can be classified as a long-term trend, intermediate trend or a short-term trend. In
terms of the stock market, a major trend is generally categorized as one lasting longer than a
year. An intermediate trend is considered to last between one and three months and a near-term
trend is anything less than a month. A long-term trend is composed of several intermediate
trends, which often move against the direction of the major trend. If the major trend is upward
and there is a downward correction in price movement followed by a continuation of the
uptrend, the correction is considered to be an intermediate trend. The short-term trends are
components of both major and intermediate trends. Take a look a Figure 6.2 to get a sense of
how these three trend lengths might look.
Figure 6.2

When analyzing trends, it is important that the chart is constructed to best reflect the type of
trend being analyzed. To help identify long-term trends, weekly charts or daily charts spanning
a five-year period are used by chartists to get a better idea of the long-term trend. Daily data
charts are best used when analyzing both intermediate and short-term trends. It is also important
to remember that the longer the trend, the more important it is; for example, a one-month trend
is not as significant as a five-year trend.

Trendlines

A trendline is a simple charting technique that adds a line to a chart to represent the trend in the
market or a stock. Drawing a trendline is as simple as drawing a straight line that follows a
general trend. These lines are used to clearly show the trend and are also used in the identification
of trend reversals.

Volume and Chart Patterns

The other use of volume is to confirm chart patterns. Patterns such as head and shoulders,
triangles, flags and other price patterns can be confirmed with volume, a process which we'll
describe in more detail later in this tutorial. In most chart patterns, there are several pivotal
points that are vital to what the chart is able to convey to chartists. Basically, if the volume is not
there to confirm the pivotal moments of a chart pattern, the quality of the signal formed by the
pattern is weakened.

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