Trading the Line

How to Use Trendlines to

Spot Reversals and Ride Trends

eBook

EWI eBook

Trading the Line How to Use Trendlines to Spot

Reversals and Ride Trends
By Jeffrey Kennedy, Elliott Wave International
Chapter 1 - Defining Trendlines
Find out what a trendline is and what it represents.
Chapter 2 - Drawing Trendlines
Learn how trendlines identify resistance and support. Also, find out how to draw trendlines, how to
spot trendline breaks and what a triple fan trendline looks like.
Chapter 3 - Trendline Trade Setups
Discover why trendline gaps and retests are Jeffrey Kennedys two favorite trendline trade setups.
Chapter 4 - Trendlines and the Wave Principle
Find out how the pros utilize trendlines in conjunction with the Elliott Wave Principle. Also, throw
under and throw over are defined.
Chapter 5 - The Kennedy Channeling Technique
Jeffrey Kennedy explains his own channeling technique, which is a simple way of drawing trendlines
that also helps identify Elliottt waves.
Chapter 6 - Questions and Answers
Jeffrey Kennedy answers questions asked by Trading the Line webinar participants.

Introduction
My name is Jeffrey Kennedy, and Im the editor of Future Junctures. In Trading the Line, I will explain several
important aspects of trendlines, including how to define them and utilize them to identify trade setups.
Specifically, in this eBook, I will cover the following topics: the definition of a trendline; what a trendline
represents; types of trendlines; techniques for drawing trendlines; trendline trade setups; the Wave Principle
and trendlines; and the Kennedy channeling technique.
Editors note: This webinar was originally presented live in January of 2008.
Trading the Line How to Use Trendlines to Spot Reversals and Ride Trends
2009 Elliott Wave International www.elliottwave.com

Chapter 1
Defining Trendlines
Before I define a trendline, we need to identify what a line is. A line simply connects two points, a first point
and a second point. Within the scope of technical analysis, these points are typically price highs or price lows.
The significance of the trendline is directionally proportional to the importance of point one and point two.
Keep that in mind when drawing trendlines.
Figure 1-1
A trendline represents the psychology
of the market, specifically, the psychology between the bulls and the bears. If
the trendline slopes upward, the bulls
are in control. If the trendline slopes
downward, the bears are in control.
Moreover, the actual angle or slope of
a trendline can determine whether or
not the market is extremely optimistic,
as it was in the upwards sloping line in
Figure 1-1 or extremely pessimistic, as
it was in the downwards sloping line
in the same figure.
Now were on to the fun part drawing trendlines. You can do this several
different ways. You can draw them
horizontally, which identifies resistance and support. Or, you can draw
them vertically, which identifies moments in time. You primarily apply
vertical trendlines if youre doing a
cycle analysis.

Trading the Line How to Use Trendlines to Spot Reversals and Ride Trends
2009 Elliott Wave International www.elliottwave.com

Chapter 1 Defining Trendlines

Figure 1-2
You can also map trendlines at an
angle, like you see in Figure 1-2, which
identifies price and time. Theres really
not a wrong way to draw a trendline,
which is why trendlines are a simple,
crucial tool.

Chapter 1 Key Points

A trendline represents bull market versus bear market psychology.
Trendlines exhibit how optimistic or pessimistic the markets can be.
Horizontal trendlines identify resistance and support. Vertical trendlines identify moments
in time. Diagonal trendlines identify both price and time.

Trading the Line How to Use Trendlines to Spot Reversals and Ride Trends
2009 Elliott Wave International www.elliottwave.com

Chapter 2
Drawing Trendlines
Figure 2-1
In this section, Ill show you how I
draw trendlines. Ill start with the most
common, simple way to draw them.
Just connect two extremes, two highs
in this instance, to identify resistance,
as seen in the line in Figure 2-1.

Figure 2-2
Another way to draw them is connecting lows, to identify potential support.
For this example, refer to Figure 2-2,
which shows a price chart of Google.
If you connect the lows in this chart,
you might be surprised what develops
when that trendline is extended.

Trading the Line How To Use Trendlines To Spot Reversals and Ride Trends
2009 Elliott Wave International www.elliottwave.com

Chapter 2 Drawing Trendlines

Figure 2-3
In Figure 2-3, that one little trendline
between the lows in 2004 and the lows
in 2005 consistently provided support for a number of retracements, or
counter trend movements, within the
advance in Google since then.
When youre drawing trendlines from
low to low, you can do something else
with them that I find pretty interesting.
Oftentimes, I like to identify the low
extremes within a move and then take
a parallel. In the example shown in
Figure 2-3, look at the trendline from
the lows within the advance in Google,
take a parallel of that line off the extreme the highest weve seen and
you can see the most recent peak in Google, the upper line, provided resistance. It was just a simple trendline
drawn on the lows and extended upward in a parallel line off the intervening extreme.

Figure 2-4
Next, in Figure 2-4, look where the upper boundary line provided resistance
of the trendline. Notice there is another
use for it. The midpoint of the trendline
provides resistance in four different
areas, which is why I include the center
point or the midline when I draw parallel trendlines or price channels.

Trading the Line How To Use Trendlines To Spot Reversals and Ride Trends
2009 Elliott Wave International www.elliottwave.com

Chapter 2 Drawing Trendlines

Figure 2-5
The price chart shown in Figure 2-5
is of coffee, and again, Ive already
drawn a trendline on it. I connected
the two extremes, points labeled 1 and
2, which provided support for points
labeled 3 and 4.

Figure 2-6
Lets look at another example in Figure
2-6, a cotton weekly chart, to exemplify how useful trendlines can be. Ive
connected the lows, points 1 and 2, and
taken a parallel off the extremes of the
price move at point 3. This shows how
a simple trendline identifies resistance
in cotton. This is why you should draw
trendlines because one drawn some
months ago, some days ago, some
weeks ago, even some years ago can
still be applicable today. This one little
trendline in the previous figure, drawn
from one low to another low, was effective on more than one occasion.

Trading the Line How To Use Trendlines To Spot Reversals and Ride Trends
2009 Elliott Wave International www.elliottwave.com

Chapter 2 Drawing Trendlines

Figure 2-7
Notice the resistance it provided in
Figure 2-7.

Note: For an additional example, see Slide 32 of Jeffrey Kennedys online trading course Trading the Line
How to Use Trendlines to Spot Reversals and Ride Trends.

Figure 2-8
Trendlines are probably the most basic
analytical tool you can apply, whether
its a stock, currency or commodity;
yet, theyre extremely effective. More
often than not, two parallel lines contain counter trend or corrective price
action. Usually, it provides support,
and you see prices either reverse near
the lower boundary line or the center
line. As you can see in Figure 2-8, the
lower boundary line provided solid
support for a subsequent move up in
prices.

Trading the Line How To Use Trendlines To Spot Reversals and Ride Trends
2009 Elliott Wave International www.elliottwave.com

Chapter 2 Drawing Trendlines

Figure 2-9
Now, heres a neat little trick. In Figure 2-9, we use trendlines a different
way. By connecting the two lows, we
distinguish the breakout point. Later,
it provides support when prices revisit
the same line (circled).

Figure 2-10
Or, we can connect the highs and take
it from an intervening low, as seen
in this soybean weekly chart. The
reversal that occurred in price at the
lower boundary line is circled.

Trading the Line How To Use Trendlines To Spot Reversals and Ride Trends
2009 Elliott Wave International www.elliottwave.com

Chapter 2 Drawing Trendlines

Figure 2-11
Most of the lines that Ive drawn thus
far have been from high to highs, taking parallels off intervening lows, or
theyve been from low to low, taking
parallels off intervening highs. Thats
not the only way to draw trendlines.
Case in point look at Figure 2-11.
We connected the two lows, and it
provided support in Google for the
subsequent events shown. However,
there was another way to identify support in this stock without drawing the
traditional low-to-low trendline.

Figure 2-12
You could have drawn the trendline by
connecting the highs and then taking
the parallel off the intervening low, as
shown in Figure 2-12. The circled area
shows support.

Trading the Line How To Use Trendlines To Spot Reversals and Ride Trends
2009 Elliott Wave International www.elliottwave.com

Chapter 2 Drawing Trendlines

Techniques for Drawing Trendlines

Figure 2-13
Ive explained how to draw trendlines
from extremes from high to high and
low to low. In Figure 2-13, I drew two
trendlines from significant highs to a
significant lows. Upon first glance, the
initial trendline does not provide the
analyst or trader with much information. However, if you draw a trendline
from a significant high to a low, or vice
versa, and take a parallel of that trendline to the most extreme point within
the move, you might discover if the
trend will break or continue.

Figure 2-14
For example, Ive drawn a trendline
from a significant low to a significant
high in Figure 2-14. I then take a parallel of that line off the lowest move
within the price sequence. That trendline identifies the end of one trend and
the beginning of a new one. As soon as
prices began closing below the trendline, the previous move was done.

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2009 Elliott Wave International www.elliottwave.com

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Chapter 2 Drawing Trendlines

Figure 2-15
Figure 2-15, a weekly bond chart,
shows another example. Draw a trendline from the high to the low, take a
parallel of that line and move it over
to the most extreme move within the
decline. Penetration of this line signals
the completion of this decline

Figure 2-16
Look at Figure 2-16, which is the same
weekly bond chart as before. Draw a
trendline from the low to the high, take
a parallel of that line, move it over to
the right, to the most extreme portion
of that move. You now know what
prices must do to signal the onset of
a new trend.

Note: For an additional example, see Slide 54 of Jeffrey Kennedys online trading course Trading the Line
How to Use Trendlines to Spot Reversals and Ride Trends.

Trading the Line How To Use Trendlines To Spot Reversals and Ride Trends
2009 Elliott Wave International www.elliottwave.com

11

Chapter 2 Drawing Trendlines

Defining Trendline Breaks

Figure 2-17
In Figure 2-17, a much shorter-term
timeframe is illustrated in a 60-minute
price chart of the E-Mini Dow. Draw a
line from the low to the high then take
a parallel to the most extreme portion
of the move. When prices begin breaking below this line, the previous move
is done.

Figure 2-18
You can utilize this approach with
much sharper moves as well, such
as the decline in Figure 2-18. When
prices begin moving above it or closing
above it, then thats a good indication
the previous move is done.

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2009 Elliott Wave International www.elliottwave.com

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Chapter 2 Drawing Trendlines

Figure 2-19
Question: When is a trendline break
a trendline break? Some people think
closes above or below trendlines indicate a trendline break. I prefer to
see price action begin moving above
or below a trendline on a high or low
basis. For example, in Figure 2-19, we
see some closing price action below
the lower trendline which I dont really
constitute as a legitimate break of the
trendline. Not until the high of the bar
is below the trendline (where the pencil
is pointing), is there an actual break of
the previous trendline.

Figure 2-20
Let me readdress the question to make
my point clear. What constitutes a
legitimate trendline break? Well, in
this instance, in Figure 2-20, Im not
looking for closing price action below
the trendline, but rather the high of the
price bar forming below the trendline.
In this instance, we did close below the
trendline (marked with the short line
and pencil). However, two or three
price bars later, the high of the bar is
actually below the trendline.

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Chapter 2 Drawing Trendlines

Figure 2-21
Lets go back to a previous example.
When the high of the price bar is below
the trendline, it signals a sell off to the
downside.

Figure 2-22
The lows of these price bars in Figure
2-22 were above the secondary trendline and that confirmed the previous
move was done.

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2009 Elliott Wave International www.elliottwave.com

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Chapter 2 Drawing Trendlines

Figure 2-23
In the subsequent advance in Figure
2-23, when the highs of each price bar
begin forming below the trendline, the
previous price move ends, and a new
price move begins.

Figure 2-24
As you can see in Figure 2-24, the low
of the price bar was above the secondary trendline, indicating an advance.
The low of the price bars are above the
secondary trendline, arguing that this
a legitimate trendline break, so prices
should move up for a while.
So, while you can draw trendlines
from different extremes, you can also
take parallels of those lines, creating
price channels. You can garner a lot of
information from the simple approach
Ive outlined here.

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Chapter 2 Drawing Trendlines

Drawing the Triple Fan Trendline

Figure 2-25
Another technique that has been
around a long time is the triple fan.
As shown in Figure 2-25, triple fans
have an origin point and three subsequent points, and trendlines are drawn
from the origin to the initial extreme,
to the secondary extreme, and then
to the third extreme. A price break
through the third trendline in a triple
fan typically signals a significant price
move.

Figure 2-26
Ill show you the triple fan approach
in Figure 2-26, a gold weekly chart.
The three points of the triple fan are
three price highs, which show an initial
trendline, a secondary trendline and a
third trendline. The break of that third
trendline typically signals a significant
move in prices, which is exactly what
gold did in this instance, rallying from
about 330 up to about 390. It all began
with that break of that final trendline.
A legitimate trendline break is when
the highs or lows of a price bar form
above or below a trendline. So, when
we saw the lows of the price bars form
above the third trendline, we knew a
change in trend was coming.

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2009 Elliott Wave International www.elliottwave.com

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Chapter 2 Drawing Trendlines

Figure 2-27
Notice in Figure 2-27, the same gold
weekly chart, that if you continue the
trendline over, it provided very nice
support for the subsequent sell off.

Figure 2-28
Figure 2-28 shows a decline from
the low. When prices began closing
above the trendline, especially where
the lows are above that third trendline,
prices moved substantially. Here, the
move pushed up only modestly higher,
from about 400 up to 430, but, still, it
was something significant. Remember,
this is a weekly price chart, so on an
hourly or daily basis, this could have
been a profitable price move.

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2009 Elliott Wave International www.elliottwave.com

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Chapter 2 Drawing Trendlines

Figure 2-29
In Figure 2-29, Ive drawn the triple
fan again. In this instance, prices were
unable to penetrate the top line, so the
triple fan really wasnt useful.

Figure 2-30
Check out another example in Figure
2-30. Its the third trendline that carries
the most weight. When prices begin
closing above it or moving above it,
certainly on a high/low basis, prices
moved significantly. By drawing a
trendline, you could have been ahead
of the crowd in identifying this price
move.

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2009 Elliott Wave International www.elliottwave.com

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Chapter 2 Drawing Trendlines

Chapter Two Key Points

Trendlines are one of the most powerful analytical tools available.
The most simple way to draw trendlines is by connecting two extremes.
Trendline breaks occur when there are new highs or new lows above or below the trendline.
Triple fan trendline applications have an origin point and three subsequent points, and trendlines
are drawn from the origin to the initial extreme, to the secondary extreme, and then to the third
extreme.
Price breaks through the third trendline in a triple fan typically signal a significant price
move.
Reactions in price will often occur at or near a trendline.

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2009 Elliott Wave International www.elliottwave.com

19

Chapter 3
Trendline Trade Setups
Trendlines offer several trade setups. In this chapter, I will explain two of my favorites.
Figure 3-1
A gap either above or below a trendline is one of the best trade setups that
trendlines offer. For example, Figure
3-1 is an oats price chart, showing two
lows and a line extended higher. In
this illustration, prices gapped lower,
which is what I consider a gap below
a trendline. This is a very reliable trade
setup.

Figure 3-2
Whenever I see a price gap below a
trendline, I place a sell order one tick
below the low of that bar. My stop is
the high of the bar prior to the price
gap. The price gap in this chart, Figure
3-2, alerted me to a potential short
position in oats; in fact, prices pushed
down to about 240.

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2009 Elliott Wave International www.elliottwave.com

20

Chapter 3 Trendline Trade Setups

Figure 3-3
Since that trade setup, there was no
price gap above the trendline in Figure
3-3, so there really wasnt an opportunity to take a trade.

Figure 3-4
The trendline drawn against the extreme continued to go farther down
in Figure 3-4, which created a price
gap at one point. This alerts me to a
buy-side trading opportunity. On the
bar where the gap is up, I place an
order one tick above the high of that
bar, while the low of the preceding bar
is my initial protective stop. The trade
was subsequently triggered, and prices
pushed on higher.

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2009 Elliott Wave International www.elliottwave.com

21

Chapter 3 Trendline Trade Setups

Figure 3-5
Even if I had not previously drawn
that initial trendline and tried to employ what I mentioned in the previous
section utilizing the triple fan, I have
my first, second and third trendlines
in Figure 3-5. Again, the gap above
the trendline signals a highly reliable
buy-side trading opportunity. My entry
price is one tick above the higher bar
that does the gapping, and my initial
protective stop is the low prior to the
gap, the lower bar.

Figure 3-6
For another example, look at the cotton
chart in Figure 3-6. Simply connect
two extremes, either two extreme lows
or two extreme highs. Prices came
down to the trendline shown and then
broke lower. The bar indicated was,
indeed, a gap below the trendline.
Therefore, I would initiate a sell position on a break of the lower bar with
an initial protective stop, the higher
bar preceding the gap, which led to a
very nice trade.

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2009 Elliott Wave International www.elliottwave.com

22

Chapter 3 Trendline Trade Setups

Figure 3-7
In Figure 3-7 there are two highs, and
prices gapped above the trendline. So
I would make my move above the high
of the bar that does the gapping. Thats
where I put my order in to the buy
side, and the low of the bar preceding
the gap is where my initial protective
stop would go.

Note: For additional examples, see Slides 97 and 98 of Jeffrey Kennedys online trading course Trading the
Line How to Use Trendlines to Spot Reversals and Ride Trends.

Gaps and Retests: My Two Favorite Setups

Figure 3-8
Take a look at the soybean oil price
chart in Figure 3-8, which shows a
simple trendline connecting one high
to another high. The circled situation
is called a retest, which is my secondfavorite trendline trade setup. Retests
occur when prices penetrate the trendline, and then come back down and
test it.
To trade in this situation, I usually like
to wait until the high of the move that
preceded the test is penetrated, rather
than buy when prices are testing the
trendline itself. In this case, I would
have waited for prices to trade back
through the high. My initial trendline connects two price highs. Prices come up through it and then come back
down and test it. When prices trade back through the high of the move, the high of the initial breakout, I like
to go long, in this instance, with a stop at the low.
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Chapter 3 Trendline Trade Setups

Figure 3-9
For another example, look at the stock
price chart in Figure 3-9. There are two
price highs with a trendline connecting
them; notice how prices penetrate the
trendline. More importantly, notice
that the lows of those two price bars are
above it and if you will recall from
the previous section, what constitutes
a valid trendline break? Its when the
lows or highs of a price bar are actually
above or below the trendline.
Figure 3-9 does show a legitimate
trendline break. So next, Im looking to
go long if prices can trade back above
the most recent swing high. The stock
price came back down very briefly,
tested the upper portion of the trendline and then began to rally. This is an example of a single trendline retest,
and soon Ill be showing you a dual or a double retest.
Figure 3-10
Look at another example of a single
line retest in Figure 3-10, a Canadian dollar chart. And, again, this is a
single line retest connecting one high
to another high. Prices trade above
it, and the low of the two bars above
the trendline constitutes a legitimate
trendline breakout. Prices come back
to the downside and begin turning up,
so I buy on a break of the highs. My
initial protective stop is the low of the
move. This was all done simply with
a pencil and ruler.

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Chapter 3 Trendline Trade Setups

Figure 3-11
Next, well learn about dual tests
in Figure 3-11, a stock chart. The
trendline is drawn from two highs
and prices trade above it, resulting in
closing price action above the trendline. The lows of the two price bars
are above the trendline, meaning its
a trendline break. The prices come
back down once, which is a single line
retest; they bounce up and then come
back down again, which is a dual or a
double trendline retest. Under the rules
I follow for a single trendline retest, I
would trade if prices move back above
the high of the original breakout. However, on a dual test like this, I wait for
the intermediate or interim high to be
taken out, and the low of the second retest is my initial protective stop. In essence, a dual trendline retest starts
when theres an initial trendline breakout. Prices come back down, are tested once, balance, come back down
and are tested again.
Figure 3-12
See Figure 3-12 for another dual
trendline trade setup, which shows a
stock connecting two highs. Notice
the first test and then the second test.
The interim high there is where I like
to go long in the market with my initial
stop at the low or the extreme of the
second retest.

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25

Chapter 3 Trendline Trade Setups

Figure 3-13
Look at the example shown in Figure
3-13. The low of the bar is above the
trendline, which indicates a legitimate
trendline breakout. Then the prices
came down. After a first test, they
bounce. After the bounce, the prices
came back down, and we tested that
trendline again, which makes it a
dual trendline retest trade setup. Once
prices trade back through that level, Id
go long market, and my initial protective stop would be the extreme of the
second retest.

Note: For two additional examples, see Slides 110 and 111 of Jeffrey Kennedys online trading course Trading
the Line How to Use Trendlines to Spot Reversals and Ride Trends.

Chapter Three Key Points

A gap either above or below a trendline is one of the best trade setups that trendlines offer.
A gap above a trendline signals a highly reliable buy-side trading opportunity.
Retests occur when prices penetrate the trendline, and then come back down and test it.
A dual trendline retest starts when there is an initial trendline breakout. Prices come back down,
are tested once, balance, come back down and are tested again.

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2009 Elliott Wave International www.elliottwave.com

26

Chapter 4
Trendlines and the Wave Principle
Figure 4-1
Its really simple to apply trendlines in
conjunction with the Wave Principle.
In fact, within the context of the Wave
Principle, we have two types of price
channels that we consistently work
with: a temporary channel and a final
channel. Connecting the extremes
of waves 1 and 3 and then taking a
parallel of that line off the extreme of
wave 2 comprise the temporary channel. This usually identifies support for
wave 4, as shown in Figure 4-1.
Sometimes price action in wave 4
penetrates the lower boundary line,
which is called throw under. Then the
next channel you see, which is the final
channel, connects waves 2 and 4. You
take a parallel of that line off the extreme of wave 3, which usually signals resistance for wave 5, either in the middle portion of the price channel
or the upper portion. On occasion, prices penetrate the upper boundary line, which is called throw over.
Simply put, there are two price channels to look at when utilizing trendlines and the Wave Principle. The first
one, again, is the temporary channel drawn between the extremes waves 1 and 3. Take a parallel of that line
off the extreme of wave 2, and that will identify support for wave 4. When wave 4 is complete, draw the final
channel, connect the extremes of wave 2 and 4, take a parallel of that line and connect it to the extreme of wave
3, which often establishes resistance for wave 5.

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Chapter 4 Trendlines and the Wave Principle

Figure 4-2
In the soybeans price chart in Figure
4-2, a temporary price channel is illustrated. Remember, draw a line from
the extreme of wave 1 to the extreme
of wave 3. Take a parallel of that line
off the extreme of wave 2. As I said
previously, throw under is when price
action penetrates that lower boundary
line.

Figure 4-3
Now, you can do a little trick to identify the extent of throw under double
the width of the price channel as shown
in Figure 4-3. That line represents a
parallel of the line drawn between
the extremes of waves 1 and 3. In this
instance, doubling the width provided
support for the fourth wave pullback.

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Chapter 4 Trendlines and the Wave Principle

Figure 4-4
In Figure 4-4, the final channel pinpoints resistance for wave 5. I connected the extremes of waves 2 and
4 and take a parallel off the extreme
of wave 3. Again, this is considered
throw over. Often times, well see a
brief penetration of the upper boundary
line and then a reversal in price, as we
did in this chart.

The initial or temporary price channel and the final price channel, originate from R. N. Elliotts work that
explains defining support for waves 4 and resistance for wave 5. Or, if youre working in a downward market,
this defines resistance for fourth waves and support for fifth waves.

Chapter 4 Key Points

Throw over is when prices penetrate the upper boundary line.
Throw under is when prices penetrate the lower boundary line.
Sometimes when the lower boundary line of the initial or temporary price channel is penetrated,
you can get an idea of the throw under extent by doubling the width of that price channel.

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2009 Elliott Wave International www.elliottwave.com

29

Chapter 5
The Kennedy Channeling Technique
In this section, Ill explain what I call the Kennedy channeling technique, which is a simple way of drawing
trendlines that will help you identify Elliott waves. Specifically, my technique helps you discern between impulse waves and corrective waves.
Figure 5-1
Figure 5-1 shows a basic five wave,
Elliott Wave advance. Theres wave 1,
wave 2, wave 3, a, b, and c for wave
4 and then wave 5. This is the classic
impulse structure, according to the
Wave Principle.

Figure 5-2
The first line or channel is the base
channel, which is a line drawn from
the origin of wave 1 to the extreme of
wave 2, followed by a parallel of the
trendline drawn against the extreme of
wave 1. When I draw my channels, I
like to have a midline separating or defining the midpoint of the channel, as
shown in Figure 5-2. Beginning from
the origin of wave 1, I drew a line to
the extreme of wave 2 and took a parallel of that line, raised to the extreme
of wave 1. I refer to the top line as the
upper boundary line and the lower line
as the lower boundary line. When price
action moves through the upper boundary line, its a third wave rally.
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Chapter 5 The Kennedy Channeling Technique

Figure 5-3
The second channel of the Kennedy
channeling technique is the acceleration channel, which encompasses wave
3. In Figure 5-3, see wave 1, wave 2
and wave 3. The acceleration channel
is important because it defines the
progress or duration of wave 3. When
prices break out of the lower boundary
line of the acceleration channel, label
the subsequent move as wave 4.

Figure 5-4
If youre familiar with my work in
Futures Junctures, you know I often
identify the corrective price channel,
which stems from the channel we draw
to identify wave 4. In Figure 5-4, look
at wave a, wave b and wave c. As long
this price move is contained by parallel
lines, the price action is countertrend,
and once complete, it will be more than
fully retraced.

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Chapter 5 The Kennedy Channeling Technique

Figure 5-5
The last channel well apply is a terminating channel, shown in Figure
5-5. Youre already familiar with this
aspect of the Wave Principle because
this is the channel that R.N. Elliott
drew that applied to his wave structure.
A terminating channel is a trendline
drawn from the extreme of wave 2 to
the extreme of wave 4, which identifies
the resistance for the fifth wave.

Figure 5-6
Notice when youre applying these
price channels on real price charts, as
shown in Figure 5-6, the upper boundary line of the base channel supports
the fourth wave at either the upper
boundary line, midline or lower boundary line. Then, as soon as wave 4 is in
place and prices have broken above the
upper boundary line of the deceleration channel, draw the final channel,
the terminating channel, to identify
resistance for wave 5. Thats how the
channeling technique works.

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Chapter 5 The Kennedy Channeling Technique

Figure 5-7
In Figure 5-7, the Kennedy channeling technique is applied to a real-time
price chart. As you can see from the
low in the chart, the Elliott waves are
fairly pronounced. See waves 1, 2, 3,
followed by a fourth wave decline and
a fifth wave rally, which is followed by
a three-way decline, A, B and C.

Figure 5-8
The channeling technique can be
extremely dynamic. Look at the base
channel in Figure 5-8, draw the initial
line from the origin of wave 1 to the
extreme of wave 2, take a parallel of
that line and extend it upward to the
extreme of wave 1. As soon as prices
begin trading and penetrating the upper boundary line of the base channel,
we know wave 3 is in progress. As
you can see, the base channel clearly
provided support for wave 4 here.
We came down to the midpoint or the
center line of the base channel and then
turned up.

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Chapter 5 The Kennedy Channeling Technique

Figure 5-9
As wave 3 develops, the acceleration
channel identifies or encompasses the
price action within wave 3, as shown in
Figure 5-9. Once the lower boundary
line penetrates the acceleration channel, wave 3 is complete. When prices
move above the upper boundary line
of the base channel, we know we are
in a third wave. Once prices break the
lower boundary line of the acceleration channel, we know this is actually
a fourth wave pullback. Since its a
fourth wave pullback, we also know
to look for support for wave 4 at either
the upper, mid, or lower boundary lines
of the base channel.
Figure 5-10
At this point, we know this is a 1, 2, 3
into the high. Theres not much price
action to work with in this chart in relation to the deceleration channel, but
just to give you a rough idea, it will
encompass the bulk of wave 4 because,
again, parallel lines usually contain
corrective price action or a counter
trend move. In Figure 5-10, see how
the base channel lines provided support for the fourth wave pullback. We
know wave 4 is complete because the
upper boundary line of the deceleration
channel or the corrective price channel
is penetrated. Also, we knew wave 4
was complete when prices opened up
the next day. Finally, the traditional
terminating channel identifies resistance for wave 5.

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Chapter 5 The Kennedy Channeling Technique

Figure 5-11
Look at the example of the Kennedy
channeling technique applied in Figure
5-11, a five-wave move in Feeder Cattle. The initial base channel is drawn
off waves 1 and 2, and essentially, Im
viewing price action in those waves.
I formed the acceleration channel by
connecting the extreme of wave 1 and
the extreme of wave 3 against the low
of wave 2. When prices move out of the
low and penetrate the lower boundary
line of the acceleration channel, wave
4 is in progress. The base channel, in
addition to identifying a third wave
price move, also marks support for
the fourth wave. In fact, prices spike
down to the center point or the midline
of the base channel. The deceleration
channel contains wave 4 and lets you
know when wave 4 is complete when it
penetrates the upper boundary line.
Figure 5-12
Finally, when waves 1, 2, 3 and 4 are
in place, draw the terminating price
channel to identify resistance for wave
5, as seen in Figure 5-12. As you can
see in this example, prices fell well
short of the upper boundary line. But if
we continued the center line, we might
have gotten close to it later, but it fell
short again.

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Chapter 5 The Kennedy Channeling Technique

Figure 5-13
Figure 5-13 is a fairly recent example,
a current Treasury note move. As usual,
the channeling technique begins with
the base channel. I started from the origin of one, and waves 1 and 2 form the
basis of the base channel. When prices
move above the upper boundary line of
the base channel, wave 3 price action
is in force. Essentially, the subsequent
price move is a third wave.

Figure 5-14
As soon as we have the base channel,
draw the acceleration channel, which
encompasses wave 3, as shown in
Figure 5-14. Once prices begin to
break below the lower boundary line
of the acceleration channel, wave 4 is
in progress. Then draw the deceleration channel by beginning from the
origin of wave A, the extreme of wave
B, against the extreme of wave A. You
can see the three-wave move down.
When prices break the upper boundary line of the deceleration channel,
wave 5 is in progress.

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Chapter 5 The Kennedy Channeling Technique

Figure 5-15
Figure 5-15 shows the original base
channel supporting the lower boundary line of the base channel, which
prompted a reversal in prices. When
prices began turning down, hit the
lower boundary line of the base channel and subsequently closed above the
upper boundary line of the deceleration
channel, wave 5 is in progress in the
T-note.

Figure 5-16
With three channels behind us, we only
have to draw the terminating price
channel, which will identify resistance
for wave 5. Its shown in Figure 5-16.
Weve been trading a bit around the
center line, but prices could still move
higher and reach the upper boundary
line of the price channel.

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Chapter 5 The Kennedy Channeling Technique

Figure 5-17
A monthly Euro price chart is my next
example, as shown in Figure 5-17. It
shows wave 1 and wave 2. Because
we have a secondary low in this chart,
Ive marked A, B and C for wave 2. As
you can see, penetration of the upper
boundary line confirms the presence
of third wave price action. The acceleration channel identifies the extent
or duration of wave 3. Wave 4 is in
progress as soon as prices broke below
the lower boundary line. Then move on
to the deceleration channel. Now, what
youll notice next is that prices in the
fourth wave were well above the upper
boundary line of the base channel. That
will ring true when you have a very
deep second wave retracement.
Figure 5-18
You can handle that situation by
doubling the width of the initial base
channel. In Figure 5-18, as soon as
the upper boundary line of the corrective or deceleration price channel
occurs, wave 4 finished and wave 5
was in progress. As you can see, we
traded right or at near the midline of
the terminating price channel, which
would be an excellent spot for prices to
begin a reversal. Bottom line, I find the
channeling technique useful because it
clearly discerns Elliott waves waves
1, 2, 3, 4 and 5, as well as waves A,
B and C.

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Chapter 5 The Kennedy Channeling Technique

Figure 5-19
Weve looked at a currency, and weve
looked at a few commodities. Next,
look at the stock in Figure 5-19, so I
can prove how powerful and dynamic
the channeling technique can be. Heres
a three-wave move wave A, wave B
and wave C. The initial line is between
the origin of wave A and the extreme
of wave B. Take a parallel of that line
and lower the line to the extreme of
wave A: That identifies support for
wave C, and its a great place to look
for a reversal in price, which is exactly
what happened to this stock.

Figure 5-20
Figure 5-20 is a stock chart that clearly
shows an impulse wave to the upside
from either low extreme. Again, parallel lines typically contain countertrend
price action. Prices moved outside the
upper boundary line of the deceleration
price channel, and then it provided
support for the subsequent decline
before turning prices up.

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Chapter 5 The Kennedy Channeling Technique

Figure 5-21
Or, look at the widest extreme, which
is shown in Figure 5-21, the most
recent swing high in this case, to see
how the midpoint provided support
or returned prices to the upside. Once
prices penetrate the upper boundary
line of the deceleration channel or
the corrective price channel, I would
expect prices to continue much higher
because it identifies when the counter
trend move is complete.

Note: For an additional example, see Slide 180 of Jeffrey Kennedys online trading course Trading the Line
How to Use Trendlines to Spot Reversals and Ride Trends.

Chapter 5 Key Points

The Kennedy channeling technique helps you identify Elliott waves and helps you discern
between impulse moves or impulse waves and corrective waves.
The Kennedy channeling technique utilizes a midline separating or defining the midpoint of the
channel.
The base channel is really the upper boundary line.
The second channel, the acceleration channel, defines the progress or duration of wave 3.
The terminating channel is a trendline drawn from the extreme of wave 2 to the extreme of wave
4, which identifies the resistance for the fifth wave.
I hope this eBook has given you a better idea of my channeling technique, how to apply it and how useful it is
in helping you decipher between impulse waves and corrective waves. More importantly, it helps you identify
when wave 3 has begun and when wave 3 ends. It also allows you to identify additional support levels for the
fourth wave pullback, as well as targets for a fifth wave advance.

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Chapter 6
Questions and Answers
Q. If prices move back into the base channel, does that mean were not in wave 3?
Kennedy: Once prices penetrate the upper boundary line of a base channel, thereby confirming
the presence of third wave price action, a revisit to the boundary line is acceptable. However,
a break of the mid-line of the base channel implies that wave 3 is not in force.

Q. How do you know when wave 3 has ended?

Kennedy: You continuously redraw the acceleration channel as each new high is made. You
do not know for sure that wave 3 is complete and wave 4 is underway until price movement
penetrates the lower boundary line of the base channel.

Q. Whats the difference between a single zigzag and a double zigzag?

Kennedy: To create a trend channel for a double zigzag, connect the origin of wave W with the
termination point of wave X and then draw a parallel line that includes the termination point
of wave W.
A single zigzag is a 5-3-5 structure, where wave A is a motive wave, wave B is a corrective
wave and wave C is a motive wave. Therefore, a single zigzag always starts with a five-wave
structure as opposed to a three-wave structure. A double zigzag, labeled W-X-Y, is composed of
two single zigzags linked by an X wave. An X wave is a corrective structure. Therefore wave
W of a double zigzag comprises three waves (the single zigzag) as opposed to the five waves in
wave A of a single zigzag. By definition, wave W of a double zigzag is not comparable to wave
A of a single zigzag, because wave W is a wave at a higher degree or larger time frame.
To anticipate whether a double zigzag will unfold, consider the context, the structure of the
wave patterns and Elliotts rules and guidelines. Context refers to the wave at the next higher
degree of which the zigzag is a part. For example, assume a single zigzag develops in wave 2,
makes a shallow retracement of wave 1 and is followed by another corrective structure at the
same degree that retraces less than 90 percent of the single zigzag. Since wave B of a flat retraces at least 90 percent of wave A, and triangles do not form second waves, we can eliminate
those two scenarios. The only other possibilities for wave 2 are a combination or double/triple
zigzag. Since combinations normally make shallow retracements, and second waves normally
make deep retracements of first waves, the most likely outcome is a double zigzag. Triple zigzags are rare.

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Chapter 6 Questions and Answers

Q. After a high-to-low trade setup, should I add to my trade on a gap trendline setup?
Kennedy: It would be a good idea to add to your position with more contracts, provided that it
did not compromise your risk tolerance parameters and capital management practices.

Q. What price data do you use for the trendline gap trade setup?
Kennedy: I use the All Sessions data for all of the above-mentioned markets because theres
more volume. The Pit Session was viable years ago, but theres not as much volume today.

Q. How do I construct a deceleration channel if wave 4 is a contracting triangle?

Kennedy: The deceleration channeling technique does not apply to triangles. There are a
number of other guidelines that you can use to estimate the end of a wave 4 triangle. You can
use the temporary channeling technique by connecting the termination points of waves 1 and
3 and drawing a parallel line that includes the termination point of wave 2. The base channel
helps to estimate resistance or support for wave 4. Within the triangle, constructing the A-C and
B-D trendlines helps to estimate the end of wave E of the triangle.

Q. How do you channel corrective waves?

Kennedy: With respect to corrective waves, the guideline of channeling applies to zigzags. You
draw a line that connects the origin of wave A with the termination point of wave B, and then
draw a parallel line that includes the termination point of wave A. That will give you a trendline
to estimate the termination point of wave C.

Q. Does wave 4 always find support at the base channel?

Kennedy: This is a guideline, not a rule. Most likely, wave 4 will find support at the upper,
middle or lower boundary of the base channel, as long as that does not result in overlap with
wave 1 at the termination point of wave 4.

Q. Is every wave that breaks the base channel an impulse wave?

Kennedy: Again, this is a guideline, not a rule. If theres a breach of the base channel, the structure is probably an impulse wave. A corrective wave structure would most likely not break the
base channel. To better make these determinations, you need to consider the context, i.e., the
wave structure at higher degrees, while applying all of Elliotts rules and guidelines.

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Chapter 6 Questions and Answers

Q. Upon a breach of the base channel, how do I know if its all or part of wave 3?
Kennedy: After a breach of the base channel, to determine whether you have reached the end
of wave 3 or have just completed part of wave 3, you have to look at the subdivisions and the
current length of wave 3. Keep in mind that wave 3 is normally longer than wave 1 and is often
extended. For example, after breaking the base channel, if you can count an initial five waves
within wave 3 but still have not exceeded the length of wave 1, youve probably identified wave
1 within wave 3.

Q. How do I draw the base channel if wave 2 makes a new price extreme?
Kennedy: If wave 2 makes a new price extreme, you should construct two base channels. A
break of the base channel that uses the orthodox end of wave 1 would signal that wave 3 is most
likely in force. A break of the base channel that uses the new price extreme of wave 2 would
be a stronger indication that wave 3 was in force.

Q. When should you use channeling versus a single trendline?

Kennedy: Theyre both useful. Channeling (parallel trendlines) is more useful for identifying a
breakout of a wave 3 impulse and estimating termination points of waves 4 and 5 within impulse
waves and wave C within zigzags. Trendlines that only connect highs or lows help to identify
resistance and support levels over the respective time period.

Q. How do I combine the Wave Principle with the material in this course?
Kennedy: You should combine this courses trendline analysis with all of Elliotts rules and
guidelines, especially Fibonacci relationships. For example, in wave 4 of an impulse wave, if a
retest of a trendline occurs at a .382 retracement of wave 3, which is common for fourth waves,
and in the area of the previous fourth wave at one lesser degree (guideline of depth), then that
would likely confirm the end of wave 4. In a fifth wave extension, a retest of a trendline might
occur at a point where wave 5 is equal to 1.618 times the length of the net distance traveled of
waves 1 through 3, which is a common Fibonacci relationship. That would be a good indication
that wave 5 had ended.

Q. What kind of charting system did you use?

Kennedy: For this particular course, the charting system was CQG. We also sometimes use
GenesisFT.

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EWI eBook

Trading the Line How to Use Trendlines to Spot

Reversals and Ride Trends
By Jeffrey Kennedy, Chief Commodities Analyst, Elliott Wave International

2009 Elliott Wave International

Published by New Classics Library

For information, address the publishers:

New Classics Library
Post Office Box 1618
Gainesville, Georgia 30503 US
www.elliottwave.com
ISBN: 978-0-932750-86-0