Trend Analysis
See Figure 5.3. Under peak and trough analysis, trend actions in scenarios 1
and 2 satisfy the conditions for being classified as uptrends, because they exhibit a
series of higher highs and lows. But what about trend actions in scenarios 3 and 4?
There are no higher highs or lows in scenario 3, and no highs or lows whatsoever
in scenario 4. Do we classify them as uptrends? Under Dow’s peak and trough
definition, they do not classify as uptrends. Nevertheless, in all four scenarios,
price traversed from Point A to Point B. Do we then deny that trends existed in
scenarios 3 and 4? Many practitioners believe that it may be better to define a
trend by an absolute measure of distance traversed rather than by the behavior of
price during a trend.
To avoid the dependence on a particular price behavior as a means of identify-
ing a trend, many practitioners choose to use other means of trend identification,
such as:■ (^) Price remaining above or below an overlay indicator
■ (^) Price remaining above or below an arbitrarily chosen price level
■ (^) The absence of a reversal of a specified amount during a trend
One popular example of price remaining above or below an overlay indicator
in order to qualify as a trend is best illustrated via the use of trendlines and mov-
ing averages. As long as price activity remains above a trendline in an uptrend,
the uptrend is considered to be still intact. The converse applies for downtrends.
This would obviate the need to inspect price behavior during a trend. In similar
fashion, as long as price remains above a certain moving average, an uptrend is
considered to still be intact. With respect to other price overlays, the trend is con-
sidered to still be intact if:
■ (^) Price remains above the Bollinger, linear regression, and moving average lower
band in an uptrend (the converse for downtrends)
■ (^) Price remains above the lower boundary of a chart pattern in an uptrend (the
converse for downtrends)
figure 5.3 Limitation of Dow’s Peak and Trough Definition of a Trend.