Should be defined by touching the RS plot at least three times
User decides if natural trend line takes precedence over 45 degree lines.
A natural trend line is defined by the action of the stock itself. A natural trend line is not required to be drawn at any predefined slope. In my opinion it should touch the relative strength plot in at least three places to draw the trend line.
The user can decide which is more important - a natural trend line or a 45-degree line. In my experience, an extremely steep natural trend line does not remain unbroken for very long and is usually associated with a highly risky – volatile stock. I do not believe that it is wise to compromise performance standards because of a shallow natural trend line.
Downtrend
Connecting only two points on the chart can draw a tentative natural trend line.
This tentative natural trendline began at (A, 1) and was extended through (C, 5) and later through (E, 9). It was in place for several years but it should have been classified
as a tentative natural trend line during the first year and a half (i.e. late ’96 to late 97).
In my opinion a tentative natural trend line is not as important and should not be given as much weight in the analysis as a fully defined natural trend line.
By W. Clay Allen CFA
Next: Major reversal patterns
Summary: Index