What are trendlines?
Trendlines represent a trend in prices of a stock. Sometimes there is no trend yet established. In order for a stock to start ‘trending’, you need to see a certain pattern of prices. The prices can be for any defined time period. At RPM assets I mostly use daily prices.
Therefore, if we are talking about an uptrend line, we need to first have a starting point, and a move higher(up trend), and then a pullback, followed by a new price high above the first uptrend. Once you have that, you can draw a trendline that starts at the low of the first uptrend start and connect it in a diagonal line to the ‘pullback’ price before it made its new price high.
In the chart below of Airbnb, you see the move up to to about 170 and than a pullback to 140, and then a new high to about 180. Now if you draw that line connecting the two points, you see amazingly how that trend becomes a point of Support and potential good buy points. Of course if it breaks that line, that is a cause of concern and potentially a time to sell the position.
The blue dots show points where the stock has pulled back above the trend line and presented buying opportunties.
A word of caution that we will discuss in future posts, the more times a stock tests a trendline, the more likely it fails and risky to buy. Generally 3 times would be the maximum, before a trendline break and new trend line likely forms.
Airbnb Stock Chart