Trendline, Support and Resistance Levels

Trend

This is the most basic concept in technical analysis. A trend can be an uptrend or a downtrend. An uptrend indicates that the prices are continuously increasing reaching higher highs and higher lows. This indicates a higher demand relative to the supply. A downtrend indicates that the prices are continuously decreasing reaching lower highs and lower lows. This indicates a higher supply relative to the demand. A trading range is the range within which the price fluctuates.

Persistence of trends

• Stock prices move in fairly persistent trends
• Price behaviour is characterised by inertia
• Price movement continues in the same path until met by opposing force.

Relationship between volume and trends

• Volume and trend go hand in hand
• When major uptrend begins, trading volume increases as the price advance and decreases as the price declines
• When a major downtrend begins, trading volume increases when price declines, and decreases when price rallies

Support and Resistance

A trend line is bound by a level of support and resistance.

• Resistance level: It’s difficult for prices to rise above this level.
• Support level: It’s difficult for prices to fall below this level. Think of it as the level at which a lot of buyers tend to enter the stock.

Change in Polarity

Change of polarity refers to the psychology that when a resistance level or support level is breached, they reverse their role. For example, when a resistance level is breached, it becomes the new support level, that is, now the prices will not easily fall below this level. Similarly, when a support level is breached and the price falls below it, the support level becomes the new resistance level, that is, the prices will not rise above this level.