Trend Analysis on the CMT Exam
Trend identification is the single most important skill in technical analysis. As Dow Theory establishes, "a trend persists until definitively reversed." Trendline analysis is tested on all three CMT levels and forms the backbone of chart pattern recognition.
For the complete curriculum, see the CMT Exam Guide 2026.
Drawing Valid Trendlines
Rules for Trendline Construction
- Minimum two points — connect at least two swing lows (uptrend) or swing highs (downtrend)
- Third touch validates — the trendline becomes significant when price respects it a third time
- Use closing prices for reliability; wicks can be used for precision
- Never force a line — if you have to ignore many data points, the trendline isn't valid
- Higher timeframes are more significant (see multi-timeframe analysis)
Internal vs. External Trendlines
- External trendlines connect extreme highs or lows (traditional method)
- Internal trendlines run through the "best fit" of price data, touching the most points
- Internal trendlines can be more useful in choppy markets
Trend Channels
A channel consists of two parallel trendlines containing price action:
- Ascending channel: Higher highs and higher lows — bullish
- Descending channel: Lower highs and lower lows — bearish
- Horizontal channel: Range-bound — neutral (see breakout trading)
Channel Width and Trading Applications
- Channel midline often acts as support/resistance
- Buy at channel support, sell at channel resistance
- Channel breakout signals trend acceleration or reversal
- Bollinger Bands provide dynamic statistical channels
Fan Lines
When a trendline is broken, steeper or flatter trendlines replace it:
- Speed resistance lines divide a move into thirds (1/3 and 2/3)
- Gann fan lines use specific angles (Gann Theory)
- Fan principle: after the third trendline breaks, the trend has reversed
Trend Strength Assessment
| Signal | Trend Healthy | Trend Weakening |
|---|---|---|
| Slope | Consistent 30–45° | Steepening or flattening |
| Volume | Expanding with trend | Declining on advances |
| Breadth | Broad participation | Narrowing leaders |
| Indicators | RSI 40–60 resets | Divergences forming |
| Moving Avgs | Price above key MAs | MA crossovers |
Trend Reversals vs. Corrections
Understanding when a trend correction becomes a reversal is critical for Level 2 and Level 3:
- Corrections: Secondary trends (per Dow Theory) retrace 33–66%
- Reversals: Break of the prior swing low/high on expanding volume
- Use Fibonacci retracements to gauge correction depth
CMT Exam Application
- Level 1: Identify trend direction, draw basic trendlines
- Level 2: Apply channels, fan lines, and integrate with Wyckoff analysis
- Level 3: Synthesize trend analysis with portfolio decisions in essays
Test your trend analysis skills with CMT practice tests. Full guide: CMT Exam 2026.
Ascending Trend Channel — Price Action Between Parallel Lines
Price oscillates within a rising channel defined by higher highs and higher lows
Trend Strength Signals — Bullish vs. Bearish Indicators
Number of confirming signals in a healthy uptrend vs. a weakening one