Easyjet just broke through a descending trendline which has held for three months, as shown in the daily chart in figure 1. There is a good chance that the breakout signals the beginning of a new uptrend. There are many ways to set price targets for a breakout. We will look at one.
Firstly, the greatest vertical distance between price and the trendline is found and measured. This is measured by the yellow box in figure 2 and labelled “X”. This box is copied exactly and translated such that the bottom of the box aligns with the point where the market broke above the trendline. This is shown by the yellow box labelled “Copy of X”, also in figure 2.
This method yields a price target of around 1560p. This target can be analysed in more detail with respect to historic market action. For instance, consider the first market swing upwards from the low labelled “A” in figure 3. The end of the range is labelled “B”.
Taking Fibonacci divisions of this range reveals that the 2.618 extension coincides very precisely with our previously determined target. This adds to the confidence which can be put in this level as a target. Another way to test the validity is to project the target level backwards in time and see whether the market has responded to it before. Figure 4 shows the chart zoomed out and the target projected backwards.
As can be seen, the market has responded to the target on a large number of occasions historically, using it as both support and resistance. This is another sign that we can allocate a reasonable degree of confidence to this price target.