The majority of technicians use historical charts to reflect the daily price and volume action in a specific instrument. In simpler terms, a chart is simply a representation of the conditions that exist in the market. While it is helpful in projecting trends and character, technical analysis cannot predict the future.

Charts are precise, accurate and correct in their depiction and astute technicians will tell you the "tape doesn't lie." Unfortunately, they do not reflect all the nuances of the market and the instrument itself. Charts exhibit patterns and relationships, but they cannot identify the causes of a market condition, nor determine it's eventual outcome. As long as you are aware of the limitations of the practice, technical analysis can be your best ally in the world of investing.

With that in mind, our focus here will be identifying changes in trend. After a new direction is established, it's very important to discern the quality and strength of the trend. In many cases, the up-trend is broken shortly after the reversal is complete. The problem for investors is to identify those breakdowns, which are significant, as opposed to the minor penetrations that simply require an adjustment of the trend line. Unfortunately, the majority of small movements will not offer a clear indication of character without confirmation from other chart developments. The key is to understand that any significant penetration of a trend line is cause for concern and requires subsequent reevaluation of the underlying position.

Before you can determine the significance of a correction or pullback, the quality of the trend must first be established. There are a number of traits common to the development stages of powerful trends. The first is the number of bottoms that have occurred at or near the trend line in the recent history of the issue.

With each successive test, the significance of the movement is increased. Another important component is the period of time before the trend undergoes a significant test or consolidation. The longer it is, the greater its technical strength and significance. The severity of the slope or angle of the trend line also has a bearing on the potential effect of any pullback. Generally, the greater the angle the smaller the consequences of any penetration. In contrast, flatter trend lines are subject to greater fluctuations when broken. You may see that effect in the current Dow-30 chart.

There are some basic guidelines to help establish the validity of a break through the trend line. The simplest factor to evaluate is the magnitude of the correction. In significant reversals, the opposing move will end well beyond the previous support area for the trend. If trading volume is light during the initial stages of penetration, a rebound is likely to occur. However, when the recovery is not supported by increased trading activity, the reversal will likely continue. A decisive break through a well-developed rally generally indicates the advance has run out of momentum and steps should be taken to protect profits.

On the other hand, a brief consolidation or topping pattern that forms well away from the trend line can often be ignored. The most important concept is that almost any activity can take place as long as the primary boundaries of the trend are not threatened for more than a brief period. Any sustained movement beyond the trend line is generally a major change in character.