the hAnDbook of teChnICAL AnALySISat the trendline, while price approaching a trendline from below will potentially
experience resistance. This occurs because most market participants will usually
place buy orders above a barrier and short orders below it. Hence, when price ap-
proaches the barrier from above, the initial triggering of buy orders will cause an
upside reaction, creating temporary support. When price approaches the barrier
from below, the initial triggering of sell orders will cause a downside reaction, creat-
ing temporary resistance. As such, support and resistance are regarded as behavioral
consequences of human psychology, biases, and emotions.
invalidating and redrawing trendlines
A trendline is invalidated once it is breached. This does not mean that it is
thereafter unusable or ineffective. A head and shoulders neckline is a popular
example of a trendline being invalidated when the formation is confirmed, that
is, when the neckline is breached. Price very frequently retests the neckline after
being breached. See Figure 5.41 for an example of an invalidated trendline and
the redrawing of a new trendline. The new trendline is drawn between the new
significant trough and the original lower trough in an uptrend. For downtrends,
the new trendline is drawn between the new significant peak and the original
higher peak. Once a trendline is invalidated, it is thereafter referred to as an
internal line.
So what actually constitutes a valid trendline penetration? The answer de-
pends on the type and extent of filtering employed. If the trader were to apply the
closing filter rule, then a valid trendline penetration would only be acknowledged
once price closes beyond it. But what if price made a very significant intraday
downside penetration but eventually closed back above an uptrend line? In such
a situation, the penetration is usually regarded as significant but nevertheless in-
valid, based on the filter rule employed. As we can see, the implications can be
figure 5.41 Confirming and Invalidating Trendlines on the 30‐min Chart of the
EURUSD.
Source: MetaTrader 4