It is time to explain trend lines

It is time to explain trend lines

It is time to explain trend lines

It is time to explain trend lines

But first, you have to know what is support and resistance.

Support and resistance represent key junctures where the forces of supply and demand meet. In the financial markets, prices are driven by excessive supply (down) and demand (up). Supply is synonymous with bearish, bears and selling. Demand is synonymous with bullish, bulls and buying.

Support is the price level at which demand is thought to be strong enough to prevent the price from declining further.

The logic dictates that as the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below support.

Trend lines: explanation

Support does not always hold and a break below support signals that the bears have won out over the bulls. A decline below support indicates a new willingness to sell. Support breaks and new lows signal that sellers have reduced their expectations and are willing to sell at even lower prices. Once support is broken, another support level will have to be established at a lower level.

Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further. The logic dictates that as the price advances towards resistance, sellers become more inclined to sell and buyers become less inclined to buy. By the time the price reaches the resistance level, it is believed that supply will overcome demand and prevent the price from rising above resistance.

Trend lines: explanation

Resistance does not always hold and a break above resistance signals that the bulls have won out over the bears.

Resistance breaks and new highs indicate buyers have increased their expectations and are willing to buy at even higher prices. Once resistance is broken, another resistance level will have to be established at a higher level.

What we can see? 

Support can be established with the previous reaction lows. Resistance can be established by using the previous reaction highs.


Look at this chart.

Trend lines: explanation

Another principle of technical analysis stipulates that support can turn into resistance and vice versa. Once the price breaks below a support level, the broken support level can turn into resistance. The break of support signals that the forces of supply have overcome the forces of demand. Therefore, if the price returns to this level, there is likely to be an increase in supply, and hence resistance.

The other turn of the coin is resistance turning into support. As the price advances above resistance, it signals changes in supply and demand. The breakout above resistance proves that the forces of demand have overwhelmed the forces of supply. If the price returns to this level, there is likely to be an increase in demand and support will be found.

Take a look.

Trend lines: explanation

In this example of the NASDAQ 100 Index ($NDX), the stock broke resistance at 935 in May 1997 and traded just above this resistance level for over a month. The ability to remain above resistance established 935 as a new support level. The stock subsequently rose to 1150, but then fell back to test support at 935. After the second test of support at 935, this level is well established.

Quiz yourself about trend lines in the following quiz:

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