|Sample trendline study|
Sample trendline study
10-year Exxon chart
By looking at the 10-year chart of this company we get an idea of it's past performance and overall trend. We can see that generally this stock has been in an uptrend for most of it's 10 year history. There is a short downtrend in the last third of the chart followed by a strong uptrend.
In this case, a buy and hold trader would have done quite well. Trading with the trend would have increased the profit significantly. For the first six years of the chart, we see a strong uptrend, then a two-year downtrend followed by a two-year uptrend. By trading with the trend we would have only been in the market for eight of the six years and reduced our exposure as well as increased our profitability.
When looking at our trading strategy, this long-term view should apply to all types of traders. Ultimately, a trader who is buying should be interested in purchasing stocks that are trending up. Even though the most recent movement indicates a strong uptrend, several market factors have influenced this price movement, specifically, the cost of oil. It would be expected that when the price of oil drops so will the revenue of this company. As long as this trend stays on track this chart still has potential for profit. If the trend breaks then we will exit our position.
5-Year Exxon chart
The 5-year chart gives us some insight into the secondary trend correction that was seen in the earlier chart. At the top of the last trend we can see a clear double top and 1 1/2 year down trend. The stock forms a period of consolidation and then breaks out into an uptrend. In the consolidation period a series of higher lows and lower highs can be seen and is similar to a triangle formation. A triangle formation indicates that when the two trends cross a breakout will occur (in either direction).
2-Year Exxon chart
For the last two years the stock has maintained a steady uptrend. In this time frame we can see some small secondary trend corrections, but nothing significant. The price keeps forming new highs.
6 mo Exxon chart
Looking at the short term, we can see that the stock is uptrending. It has recently had a short period of consolidation, followed by another upward breakout. Trading in this time frame would be considered the domain of the swing trader.
As stated in Dow Theory, there are secondary trends contained within the primary trend. In this chart we can see that the long-term trend (major trend) is up, there is a correction/secondary trend (the short term down movement), and then the trend is continued. We can also see a period of consolidation when a new 5-year high is formed. This period of consolidation could be caused by profit taking and uncertainty of price value. The price then moves sideways before forming a new high indicating that the major trend is still intact. Until the new high is formed it would be wise to assume that this could be a trend reversal. As seen in the 5-year chart and the first high, a double top is formed before the major trend is broken downward. According to the 2-year chart, this stock is in a clear uptrend and at this time period (or greater) small corrections are easier to ignore.