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A day trader or longer term stock trader may
see the prices violate the trendline briefly during the day’s trading.
However, when the trade closes in the direction of the original trend,
the trader may be left in doubt as to whether or not the trendline was
really broken. Looking at the picture below, you can see just such a
situation. Note how the prices dipped under the trendline but still
closed above the up trendline? Should this line be redrawn?
There’s no steadfast rule to follow in this case. Sometimes it’s best
to ignore this minor violation when the rest of the day’s activity
proves the original line is valid. Still, a veteran Swing or Options
trader, may want to compromise by drawing a second dotted trendline
until it can be determined in time which line is more true.
When we previously discussed support and resistance levels, we learned
that support could become resistance and resistance become support
once the levels were violated. That principle also applies to
trendlines. This means when an up trendline, a support line, is
significantly broken it will usually become a resistance line. A down
trendline, a resistance line, often becomes a support line once the
break is evident. It is a good idea when using a trendline in Day
trading or Swing trading to project that line as far out to the right
of the chart as possible.
The above chart shows how a up trendline can switch roles, and become
an indicator of the support and resistance levels. See the rising
support line become resistance. A support line usually functions as a
resistance barrier on subsequent rallies after it has been broken on
the downside.
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