Technical analysis, trend analysis. Now, trend analysis and trends are perhaps the most important aspect of technical analysis. And it's based on the observation and that market participants tend to act in herds and that these trends tend to stay in place for some time. Now, there are four potential trends that we normally see. First, an upward trend, of course, a downward trend, a sideways trend, and actually no trend because not all securities are in the trend and little useful forecasting information can be taken from technical analysis when a security trend cannot be identified. Let's take a look in upward trend. Here we have a two-year chart of the S&P 500 ETF. The blue line shows the upward trend for the index during the period. Now, an upward trend for a security like this is when the price goes to higher highs and higher lows. So that means as the security moves up in price, each subsequent new high is higher than the prior high. And every time that there is a retracement or a pullback, which is a reversal in the movement of the security's price, it must stop at a higher low than the prior low in the trend period. And what does this indicate to technicians? Well, it indicates demand pressure is higher than supply pressure, creating an upward trend. It also means that investors seem willing to pay higher prices despite the increase in cost throughout the period. And lastly, it could mean that a large institutional investor is accumulating the stock, creating that upward pressure. Now, one more thing to point out here is a major breakdown through the trend in December of 2018. Now, a major breakdown like this of course is when the price drops through and below the trend line by a significant amount. Many technicians use the five to 10% below the trend line as a barometer, and this may indicate that the uptrend is over. It may signal further weakness in the price. Now, a more minor breakthrough for a short period of time would carry a lot less weight in technical analysis. And that's because time is also a consideration in trends. The longer the security price stays below the trend line in this case, the more meaningful the breakdown is considered to be. Next, we'll take a look at a downward trend. Here we have a two-year chart of a European ETF. The downward trend line is marked in red, and it's when the security makes lower lows and lower highs. As you would expect, just a complete opposite of an upward trend. Also, supply pressure appears to be higher than demand pressure, pushing the stock lower. Sellers are willing to sell at lower prices despite the decline, and it could indicate a liquidation by an institutional investor. As we look at the end of the chart, we see the price approaching the trend line, creating potentially a situation where it could break out to the upside. Now, instead of an absolute trend line upward or downward like we've seen, something similar to a trend line is a moving average line that can also be used in technical analysis. Moving averages smooth out short term price fluctuations, giving the technician a clearer image of the market trend. And examples might be a 50-day moving average or a 200-day moving average which is a good measure for an entire year. Moving averages can also be combined with absolute trend lines like we're using here for additional insight. Now, there are two concepts related to trend that are important to discuss. Support and resistance. First of all, support. Support is a low price or usually a range in which buying activity is sufficient to stop a decline in price. And we'll take a look at an example here. You can clearly see a price level where buyers are willing to buy the stock after a decline, creating essentially a floor for a stock from a technical perspective. There are also resistance lines, and this is a high price or a high price range whereas enough sellers come in to essentially put a top on the price within a range. And you can clearly see that level here marked resistance. Now, a key principle of support and resistance as a part of technical analysis is the change in the polarity principle as it's called, which states that once a support level is breached significantly, it has the potential to become a resistance level. And the same could be true for resistance levels. Once they're breached, they have the potential to become support levels for the stock going forward.
