Elementary Trend Analysis, Q's Almanac of Technical Analysis, Edition #2 (10/11/2021)

You can't build on weak foundations 🙅‍♀️🙅‍♂️ It's back to basics in tonight's edition of the Q's Almanac of Technical Analysis. Read on for a starter guide to the Three Major Trends and more 👇

Q's Starter Guide to Elementary Trend Analysis

Executive Brief

  • Market psychology acts as a significant driver of price action

  • Three major types of trends include the primary, intermediate, and short-term

  • Primary trends are influenced by changes in market fundamentals

  • Intermediate trends interrupt the primary trend movement

  • Random news events are more likely to affect the development of a short term trend

What is a Trend?

Price movements in an irregular but persistent direction broadly classify a trend. 

It is crucial to consider the technical definition of market exchange to develop a robust understanding of trend analysis techniques: 

Market Exchange: A place where buyers and sellers meet to determine a fair price for the asset. 

The intimate relationship between psychology and price is inherent across the individual transactions that occur within the market exchange. Evidence of this dynamic relationship is openly available on price charts and verifiable in price action.

Learn more about how Ascending and Descending Wedge price patterns form. This free article explores the relationship between psychology and price action with our imaginary friend Andy... 

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The technical definitions of trends serve as an essential basis for more advanced trend analysis techniques:

Definition of an Up Trend and Down Trend

An Up Trend is a rising trend in price over a given timeframe.

Recall Charles Dow's original observation; a technical analyst regards an Up Trend as a rising market moving in a series of ascending waves - i.e. a sequence of Higher Highs (HH) and Higher Lows (HL).

Above: Illustration of a three-wave uptrend indicated by Higher Highs (HH) and Higher Lows (HL)

On the other hand, the Down Trend is a falling price trend over a given timeframe. Thus, price action validates a Down Trend by producing a sequence of Lower Highs (LH) and Lower Lows (LL).

Above: Illustration of a three-wave downtrend indicated by Lower Highs (HH) and Lower Lows (HL)


What drives the formation of a Trend?

It is equally vital that aspiring technical practitioners gain an appreciation of one particular view on trends, often neglected by the mainstream.

Specifically, the idea that various trends taking place at any given time are a pure and honest representation of a consensus in psychology. Thus, the psychology of buyers and sellers - bulls and bears - drive price action formation with each successful transaction within the market exchange.

Consider that this distinct influence of psychology on price affords the technical practitioner an improved foresight - in that psychology (human nature) is more or less constant.

People tend to make the same mistakes.

It is this flawed yet beautiful part of human nature, which forms the basis of technical analysis on any timeframe.

If you’re hooman and make mistakes, leave a comment to let us know you agree 👇

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If you’re a robot, then… beep beep boop brrr

Relationship between Trends and Timeframes

Although the human drivers behind trend formation are identical across monthly (MN) or one-minute (M1) price charts, the clear difference is the magnitude of the trend. 

In other words, the struggle between bulls and bears is more significant on the macro-battlefield versus on the intraday charts. As a result, trends on higher timeframes are more significant than trends on lower timeframes. 

Develop this understanding further by learning about the Three Major Types of Trends.

Three Major Types of Trends

Expanding on the relationship between time and price is simple when interpreting an idealised representation of the three major trend types.

This discussion covers the following three types of trends:

  1. Primary Trend

  2. Intermediate Trend

  3. Short-Term Trend

Primary Trend 

According to the market cycle model, the primary trend is a general reflection of the attitudes and sentiments of market participants unfolding within the business cycle.

Ergo, price action in primary trends turn upside as overbearing optimism compels confident sentiment. Meanwhile, speculators may begin to seek reversal opportunities as pessimism draws price action along for a move to the downside.

Recall that the primary trend is a broad representation of the attitudes and sentiments of market participants towards shifts in fundamentals throughout the economic cycle. 

Extrapolate this perspective to understand better the significance of each primary trend:

When the business cycle begins its transition into a bullish market period, Q monitors for technical evidence that confirms a shift to a rising primary trend. 

Conversely, a fundamental shift to bearish markets elevates the likelihood of an impending reversal into a falling primary trend. Accordingly, the duration of the primary trend may span many months to years - due to its varying with changes in market fundamentals.

Note that there is no definitive or 'one size fits all' answer for the specific duration of a particular trend for all types of trends. 

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Intermediate Trend

This new insight of Dow's observation and the primary trend forms the basis of interpreting the intermediate trend.

Notice that for most price charts, an advance upside or fall downside is unlikely to be linear. 

In other words, a primary upswing is likely interrupted by several counter-trend reactions along the way. 

Primary Upswing = Swing (Low - High) in a Rising Market

Primary Downswing = Swing (High - Low) in a Falling Market

As such, technical theory regards the counter-cyclical trends as intermediate price movements within the rising or falling primary trends. 

While these intermediate trends may present highly believable setups, they are equally deceptive and prolific in extracting capital donations from the unwary technical practitioner.

For example, a set of unexpectedly positive economic data may lure investors into thinking a receding market is transitioning to an expansionary period (rising primary trend). However, the bear market continues as more data emerges later, revealing a far more grim picture. 

In this context, the intermediate trend may last for several months or weeks.

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Short-Term Trend

Its name aptly describes the duration of this following form of price trend, which interrupts an intermediate trend cycle.

Although these trends are susceptible to influence from random news events, they also present technical practitioners with a challenging trend to identify compared to its intermediate and primary counterparts.

Compared to their intermediate and primary counterparts, these trends are more susceptible to influence from random news events - creating a challenge for technical practitioners to identify.

As a rule of thumb, the ease of identifying a particular trend rises with its period of reference. Likewise, a trend developing in a shorter timeframe is likely to be more random. 

While the specific period will vary, a short-term trend may develop over several weeks in relation to primary and intermediate trends. 

Examine the simple diagram below to visualise the relationship between significant types of trends and further introduce practitioners to advanced concepts in technical analysis.

Q will discuss advanced concepts like multi-timeframe analysis and accumulation/distribution theory in coming editions. Stay tuned!

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Above: A representation of the Market Cycle Model

RED = Primary Trend

GREEN = Intermediate Trend

YELLOW = Short-Term Trend

A note on supplementary trends...

In technical theory, trends exist in many other forms - such as the secular, intraday, etc. 

For the moment, Q avoids diluting focus and has set aside a more extensive discussion in future strategy-based editions.

However, drawing upon the three major types of trends allows both the long term and short term trader to justify this principle:

Pleasant surprises occur in the direction of the main trend. 

In other words, short-term trend movements to the upside are generally of greater magnitude within the bounds of the prevailing rising primary trend. Similarly, the short-term downtrend will likely gain more ground to the downside of a dominant primary downtrend.

The trend is your friend!

While the reward potential for securing an accurate reversal position at the height of a bull market/bottom of a bear market is tempting, Q notes that counter-cyclical trading naturally heightens the risk - i.e. trading against the main trend may result in correspondingly higher risk to lower reward.

See you again for the next update.

- q

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