Trend Analysis
■ (^) Consolidation may cause a trendline to be breached at some point in time, in
the absence of a legitimate trend reversal.
Continuation & reversal trendline entries
We may also classify trendlines as reversal or continuation in the following manner:
■ (^) Trendlines that allow breakout in the direction of the existing trend are re-
ferred to as continuation trendlines.
■ (^) Trendlines that allow breakout in the opposite direction to the existing trend
are referred to as reversal trendlines (see Figure 5.43).
As such, the practitioner must ascertain which wave degree is being observed
in order to determine whether a trendline breach is a continuation or reversal of
the existing trend.
Channel Construction
Channels may also be created by projecting a trendline from a significant peak or
trough that is parallel to the uptrend or downtrend line. Channels are useful in
that they indicate potential:
■ (^) Entry levels
■ (^) Profit‐taking levels
■ (^) Future price targets
■ (^) Stoploss levels
Figure 5.44 illustrates the construction of a rising channel. First, draw an up-
trend line based on two significant troughs, indicated at Points 1 and 2. Then lo-
cate a significant peak above the trendline, which in this case would be the peak
at Point 3. Draw a line parallel to the uptrend line from the peak at Point 3 and
project it upward. This projected line is called the channel or return line. This
figure 5.43 Continuation and Reversal Trendlines.