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Traders and Trendlines: A Match Made in Opportunity Heaven

See why this simple tool helps identify high-probability trade set-ups in real world markets

by Nico Isaac
Updated: November 24, 2015

It's the start of the winter holidays -- which, if your family is anything like mine, is also the beginning of a long tradition of deeply regrettable line-crossing, i.e.:

  • Crossing that line into interrogating "new" dinner guests as to why they are still single
  • Crossing that line into inviting your recently divorced sister-in-law to "stay as long as" she needs
  • Crossing that line into a third (no, let's be honest) fourth helping of pecan pie

In these cases, crossing "the line" is the first step down a proverbial mine field of emotional and physical discomfort. And there's no going back!

But in the world of technical analysis of financial markets, crossing one kind of line is often the first step to identifying a high-confidence trade set-up. The line I'm talking about is the trendline.

Trendlines are exactly what they sound like -- lines that identify the dominant price trend of a particular market. Simply put, they connects two points, usually price highs or price lows. And, as our chief commodities analyst Jeffrey Kennedy explains, "trendlines are one of the simplest and most effective tools a trader or analyst can employ."

In order to see why, here are two real-world examples of major market reversals forecast by Jeffrey Kennedy with the help of trendlines.

-- Gold --

In the November 2010 of our Monthly Commodity Junctures, Jeffrey employed a rare trendline timing technique to calculate the next likely turning point in gold's future:

"As always, we begin with a 1-2 trendline and a parallel of that line against point 3. Next, we connect points 3 and 2 to identify that line's midpoint 4. The timeline begins at point 1, February 5, and moves through point 4 to cross the trendline drawn from point 3 on December 6.

How do we use this information? For starters, we mark this date on our calendars and watch and wait."

So, how did this timing technique pan out? Well, the next chart shows you exactly what happened: Gold hit $1431.10 per ounce, the high of the year in 2010 on December 7, missing the forecasted market turn by a single day. In the weeks that followed, gold fell 8.6%."

-- Orange Juice --

In the May 3, 2011 Daily Commodity Junctures, Jeffrey set the bullish stage in orange juice after prices broke through a specific trendline:

"Prices have penetrated critical trendline resistance on a daily closing basis. As you know, I am a huge advocate of trendlines, as well as daily closing price action. In other words, today's events are significant in the fact that it signals a resumption of the larger uptrend and clears the way for higher prices beyond this year's high of 179.30."

From there, O.J.'s uptrend went into full swing, with prices soaring well above the year's high as Jeffery anticipated:

The truth is, no technical tool works alone -- and that includes trendlines. In the world of market forecasting, there is no magic all-purpose measure.

But what we can say is this: Trendlines -- used in conjunction with the Wave Principle and other tools like MACD or RSI -- is the mark of a truly complete technical toolbox.

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5 Ways You Can Use Trendlines to Improve Your Trading Decisions

Learn five ways to draw trendlines that will help you to identify support and resistance, the end of a move, and changes in trend -- critical information for your trading success.

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