Trendlines
Accepting that markets are not entirely random is one of the basic tenets of charting and identifying the trend is the first crucial step along the road to making your prediction.
Markets don't, however, glide gently upwards in a perfectly linear direction.
An uptrend is characterised by successively higher highs, while the periodic pullbacks form successively higher lows.
The reverse is true of a downtrend.
Just to add a degree of monotony to the process, share prices and markets can spend long periods just marking time.
If we know where the market is headed we can construct a trendline.
In a rising market a line can be constructed underneath the successive lows formed by the pullbacks within the bull move. (see below)
In a bear market the trendline will be a downward sloping line connecting the tops of the bear market rallies. (below)
Pullbacks to an upward sloping trendline in a bull market can be used as buying opportunities by those who have missed out on the initial move.
When a trendline is violated, it is an important early signal of a change in the direction of the trend.
If the market closes below a trendline - one that has supported the market on repeated occasions over several months of a bull market - it is a signal that the technical trader ignores at his peril.