1) Here is a quick coverage of what 'Trend' actually means in investing

For those who may be new, or just like a refresher

A thread:

2) I think we are all familiar with the concept of a trend

As a child, one trend I remember well was the adoption of shoes with wheels fitted to the heels by all children my age

The idea of trend is perhaps the most crucial aspects to technical analysis

3) This is largely based on the reflection that investors, of all forms, tend to adopt herd mentality when we consider certain trends

These trends can remain rooted in the market behavior for longer than they should

4) There have been countless examples, but one we may all be familiar with is the adoration of tech from 1995/1999. That lasted for some time and did not end well. However, trends are not always bubble-inducing

5) Trend can be recognized in industries or single securities. These securities can be categorized as being in an upward/downward trend, sideways trend, or having zero trend

You will find that a security with an absence of trend, will be difficult to extrapolate into the future

6) Therefore, it is critical that we never force conclusions about trends in a way that we are fabricating a trend. Simply put, sometimes there is simply no trend, and that is okay.

7) 𝐔𝐩𝐰𝐚𝐫𝐝 𝐓𝐫𝐞𝐧𝐝

We can consider an uptrend to be when a security’s price reaches higher highs, but the lows are also higher lows

Each time the security consolidates a little, the low point that it reaches, should be higher than the previous low point

8) The trend line is typically drawn by connecting the low points on the chart. As you can see, each subsequent drop in share price settles at a higher price than the previous low. This supports the upwards trend notion

9) Should the share price encounter a significant break below the previous low of, say 5-10%, we can then consider the upwards trend to be over

10) One point we can use to rationalize the severity of the downtrend is that the longer the price remains below the trend line, the more severe the breakdown is considered to be

Think about up-trends in a matter that relates to supply and demand. In up-trends ....

11) the demand (buyers) for the stock outweighs the relative supply (sellers)

In this way, investors are paying greater and greater prices for the same security over a prolonged passage of time.

12) Something to note: the uptrend and increasing demand may be a factor of increased outlook on the firm’s true value, or it may be speculative

Either way, the data does not lie, it is an uptrend

13) 𝐃𝐨𝐰𝐧𝐰𝐚𝐫𝐝 𝐓𝐫𝐞𝐧𝐝

A downtrend is simply the opposite of what we would expect in an uptrend. The security in question would be expected to make lower highs and lower lows, over time.

14) As the price falls, each spike in share price must plateau at a lower price than the previous price incline. Each time the stock price drops, it must land at a lower low than the previous low.

15) Here is a short time period from 2018 whereby Roku Inc was in an apparent downtrend. The downtrend is broken in January 2019 as the new high is above the previous high

16) Lets jump back to demand and supply for a moment. In downtrends, supply (selling) overwhelms demand (buying). Simply put, sellers are willing to accept lower and lower prices to exit their position. These trends are expected to continue until evidence of a break is apparent.

17) A security may trade in a fairly narrow range, moving sideways on the chart without much upward or downward movement. This pattern indicates a relative balance between supply and demand.

18) 𝐒𝐮𝐩𝐩𝐨𝐫𝐭 𝐚𝐧𝐝 𝐑𝐞𝐬𝐢𝐬𝐭𝐚𝐧𝐜𝐞 𝐋𝐞𝐯𝐞𝐥𝐬

Two concepts that are directly related to trend analysis are support and resistance levels.

Support levels are simply price ranges in which the buying activity from investors is sufficient to stop the pressure from ...

19) sellers taking the stock below a specific price.

Resistance levels are simply price ranges in which the selling activity from investors is sufficient to stop the pressure from buyers taking the stock above a specific price.

20) These levels can be largely physiological. The collective market may feel that Starbucks are fairly valued at $50, thus will buy it in excess close to those levels. Equally, at the $65 range, they may feel it is too expensive, and sell.

21) The key thing to take onboard here is something called the 𝐩𝐨𝐥𝐚𝐫𝐢𝐭𝐲 𝐩𝐫𝐢𝐧𝐜𝐢𝐩𝐥𝐞. This states that whenever the support level is breached, it becomes a resistance level. The same is apparent for a resistance level; once it is breached it becomes a support level.

22) Both support and resistance levels are commonly whole numbers. This plays on the psychological element in that at price X investors consider the stock attractive and buy it. Equally at price Y the security appears to be overpriced, and investors will sell it and reap profits.

23) That concludes our brief introduction to trend analysis for today.

Hope you learned something

IT