A Lesson in Drawing and Using TrendlinesThe following article is adapted from a brand-new 50-page ebook from Elliott Wave International. Learn more about The Ultimate Technical Analysis Handbook, and download your free copy here.
September 24, 2009
By Jeffrey Kennedy
When I began my career as an analyst, I was lucky enough to have some time with a few old pros.
One in particular that I will always remember told me that a kid with a ruler could make a million dollars in the markets. He was talking about trendlines. I was sold.
I spent nearly three years drawing trendlines and all sorts of geometric shapes on price charts. And you know, that grizzled old trader was only half right.
Trendlines are one the most simple and dynamic tools an analyst can employ... but I have yet to make my million dollars, so he was wrong -- or at least early -- on that point.
Despite being extremely useful, trendlines are often overlooked. I guess it’s just human nature to discard the simple in favor of the complicated.
(Heaven knows, if they don’t understand it, it must work, right?)
In the chart above, I have drawn a trendline using two lows that occurred in early August and September of 2003.
As you can see, each time prices approached this line, they reversed course and advanced.
Sometimes, soybeans only fell to near this line before turning up.
Other times, prices broke through momentarily before resuming the larger uptrend.
What still amazes me is that two seemingly insignificant lows in 2002 pointed the direction of soybeans -- and identified several potential buying opportunities -- for the next six months!
Get more lessons like the one above in the free 50-page Ultimate Technical Analysis Handbook. Learn more and download your free copy here.
Jeffrey Kennedy is the Chief Commodity Analyst at Elliott Wave International (EWI). With more than 15 years of experience as a technical analyst, he writes and edits Futures Junctures, EWI's premier commodity forecasting service.