Investopedia defines Trend Analysis as;
An aspect of technical analysis that tries to predict the future movement of a stock based on past data. This type of analysis is based on the idea that what has happened in the past gives traders an idea of what will happen in the future.
Trend analysis tries to predict a trend like a bull market run and ride that trend until data suggests a trend reversal (e.g. bull to bear market). It is also helpful because moving with stock market trends, and not against them, will lead to profit for an investor.
Trend Analysis in an Uptrend and a Downtrend
An uptrend is representative of price tops continuing to make new highs with every following bottom higher than the previous one. A downtrend is representative of subsequent tops (peaks) each lower than the previous one and subsequent bottoms (troughs) each lower than previous bottom.
Trend Analysis in a Flat or Sideways Market
Represented by prices moving in both up or down direction but in small amounts more or less at the same level. (See Market Analysis)
Each of the above analysis will display a chart formation (or trend) over time, even in erratic market conditions. The trends will display a series of peaks for the high, and troughs for the low, from which a line can be drawn to establish trend analysis for potential support and resistance targets. The lows establish possible price support and the highs establish possible price resistance. This type of stock market analysis allows for a target price for possible resistance at an area in the chart where sellers overtake buyers, and support at target price at an area in the chart where buyers overtake sellers. The longer price stays within the established support and resistance area, the more important it becomes to the overall analysis.
Technical analysts use trend analysis to establish support and resistance tools to help them spot and track price trends on stock market charts. Technicians have long considered support/resistance as very important tools in their analysis. Trendlines must be drawn correctly and require a minimum of three peaks or troughs. Any connections less than three do not have confirmation and are not valid trendlines.
So far in our trend analysis we have considered stock prices, but volume is also important as it represents the total activity in a given time period. The heavier the volume during a time period the greater influence it has on our trend analysis. Technical analysts believe volume changes measure price pressure and can predict potential trend reversal. Lower volume implies price trend may be coming to an end. Higher volume can imply increased interest and possible price increase. Volume that is leveling off after an established trend can provide early indicators to the end of a trend. View our newly released training tutorial on trend analysis.