A downtrend occurs when a stock or index makes consecutive lower lows and lower highs, resulting in a price decline which trends lower. Each relative low is below the preceding low, and each relative high is below the preceding high. Downtrend lines gain more validity each time price touches but does not penetrate the trend line. A downtrend remains a trend until this series of lower highs and lower lows is broken. An upside penetration of a descending trend line is a buy signal, and usually is the first indication that a downtrend may soon end. A downtrend is deemed to be complete with the formation of a higher low or higher high. This provides a trading opportunity to go long once a downtrend is broken.
Example of a stock downtrend:
The chart above shows a stock in a downtrend. The trend line connects lower highs and matches the slope of the downtrend. Trend trading offers tremendous profit potential when a trend is identified correctly.
Example of a downtrend line:
A downtrend line or descending trend line connects lower highs during a downtrend, but the upside penetration of the downtrend line is a technical buy signal. The break of the downtrend line signals an end of the trend, and offers a trading opportunity to buy.
Downtrend lines are one of the most reliable signals we trade, so we point them out regularly to members of our stock pick service. Come trade with us!