TA 101 – Part 9
This is the ninth part of a series of articles about technical analysis from a new course we're developing. If you are new to charting, these articles will give you the “big picture” behind the charts on our site. If you are an “old hand,” these articles will help ensure you haven't “strayed too far” from the basics. Enjoy!
See the entire series Technical Analysis 101
Price Channels
Trending prices often form a channel where prices can be bounded above and below by parallel trend lines. When trend channels form, it is helpful to draw the top and bottom trend lines and monitor how well prices stay within the channel.
If prices in an uptrend fail to reach the upper channel line, the uptrend may be weakening and getting ready to reverse. Also, if prices suddenly break above the upper channel line, the uptrend may be either beginning to exhaust itself and reverse direction or be starting a new, steeper trend. Similar behavior also happens in downtrend price channels.
Trend Changes
Trending prices can only go three directions: continue in the direction of the trend, change to a trading range, or reverse the direction of the trend. Trend changes are most easily recognized by watching the price peaks and troughs. An uptrend makes higher price peaks and troughs. A downtrend makes lower price peaks and troughs. In a trading range, price peaks and troughs are roughly equal over time.
A change in uptrend begins when a new price peak is similar to or lower than the previous price peak. The change is confirmed when the next price trough is similar to or lower than the last price trough.
Changes in downtrends and price ranges occur in the same way. New price peaks or troughs break the pattern of prior ones, with the next peak or trough confirming the change.
Price and Volume Data Adjustments
When a company pays out a dividend or a fund makes a distribution, it can affect the price of the underlying security. For example, after a company pays out dividends (ex-dividend date), the price of the stock drops by the dividend amount. Because of the change, price and volume data adjustments are necessary for technical indicators to be valid.
Technical analysts generally view charts with adjusted price data. In the Classic SharpCharts Workbench, if you'd like to view unadjusted price data, type an underscore symbol before the ticker symbol, i.e. _TSLA.
If you're using the New SharpCharts Workbench, and you want to view unadjusted price data on your chart, uncheck the Adjust For Dividends box (click the settings icon).
In part 10 we'll look at how volume can confirm trend-change signals.
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