Trends, channels and breakouts: describing the evolution of a price
Looking at a price curve means first asking what phase you are in: is the price rising, falling or moving in a range? This reading of the trend is the basis of technical analysis: almost all the other tools (patterns, indicators, levels) are read in relation to it. This article presents the notions of trend, channel and breakout, the criteria used to spot them and, above all, their limits.
The 3 states of a market
- The uptrend: a succession of higher highs and higher lows. Each rebound goes further than the previous one, each pullback stops higher.
- The downtrend: a succession of lower highs and lower lows.
- The market without a trend (or "sideways"): the price moves in a range, without ever-higher or ever-lower highs and lows.
This vocabulary comes from Dow theory. It does not say where the trend comes from or how long it will last: it describes what has happened.
Timeframes
The same curve can be rising on a weekly scale and falling on a yearly one. A distinction is generally made between a long-term trend (months or years), an intermediate one and a short-term one. Many analysts start with the longest timeframe to place the context, then move down to shorter ones.
The trendline
The trendline connects at least 2 lows in a rise (or 2 highs in a decline). Many analysts consider it significant only from a 3rd contact, a convention that remains debated. It serves as a visual reference: as long as the price stays above the line of an uptrend, the trend is considered intact.
The choice of points remains partly arbitrary: two different lines can connect slightly different points, and a line drawn on a logarithmic scale does not sit like a line drawn on a linear scale.
The channel
When the price moves between a trendline and a parallel drawn on the opposite side, this is called a channel (rising, falling or sideways). The edges of the channel act as support and resistance: see support and resistance.
Moving averages as a trend filter
Moving averages smooth prices. Some analysts consider the trend rising when the price is above its 200-session average, or when a short average is above a long one. These filters have a flaw: they react with delay. They confirm a trend once it is well under way, and often produce many false signals when the market has no trend.
The trend break
When the price falls below the line of an uptrend, or crosses the edge of a channel, this is called a breakout. It can correspond, depending on the case, to:
- a trend reversal;
- a pause before the move resumes;
- a shift to a sideways market.
It is only known after the fact. Analysts look for clues: a clear close beyond the line, high volume, a return to the line (retest) that then confirms it as resistance. False breakouts, where the price quickly returns above the line, are common.
The limits of trend reading
- It is retrospective. A trend is recognised when it is already well under way, and its start or end is always debatable.
- It is subjective. The same chart inspires different lines.
- Markets without a trend defeat it. In a range, trend signals follow one another and contradict each other.
- A trend does not guarantee its continuation. It describes past behaviour.
Key takeaways
- Uptrend: higher highs and lows; downtrend: lower; sideways: range.
- The trendline and the channel are visual, partly subjective reference points.
- Moving averages filter the trend, with delay.
- A breakout can signal a reversal, a pause or a sideways market, and false breakouts are frequent.
To go further, see chart patterns and the RSI and MACD indicators.
This article is for information and education only and does not constitute personalised investment advice. The examples are illustrative. Past performance is not a reliable indicator of future performance.