Trendline breaks can signal reversals or consolidation

16 мая 2020 г.

Earlier, we noted that the completion of a price pattern can signify either a reversal in the previous trend, called a reversal pattern, or a resumption of the previous trend called a consolidation or continuation pattern.

Similarly, a break or violation of a trendline will result in either a reversal of that trend or its continuation. First, USDZAR chart showing a violation of an upward trendline that changed the predominant trend to a downtrend. Next , a EURUSD chart that shows the resumption of the prevailing trend after the break of the trendline.

Generally, whenever a trendline is broken or violated, the odds strongly favor a change in trend which change can be an actual reversal or a sideways trading range following the preceding trend.

Take note of the angle of ascent or descent of a trendline when it is violated. Since sharp-angled trendlines are less sustainable, their violation has a tendency to be followed by a consolidation rather than a reversal. The EURUSD chart above illustrates this well.

Also, a trendline violation may occur at the time or just before the successful completion of a reversal price pattern.

Extended trendlines: Most people will assume that when a trendline is violated that the trend has changed and eventually forget about the line. Sometimes, price will move back to that line making it an extended trendline. When price moves back to a trendline that has been violated, this movement is called a throwback move. In a throwback move, a trendline that has been acting as support will reverse its role to resistance and for a downtrend, a downward trendline that has been acting as resistance will reverse its role to support from the throwback move.