Support, Resistance and Trend Lines

Support and Resistance

The correct names for the peaks and troughs in the previous discussion are Support and Resistance. Support: The troughs are called Support, the term indicates a level below the market where the buying interest is sufficiently strong to overcome selling pressure. Usually a support is identified beforehand by a previous reaction low. Resistance: The peaks are called Resistance and the term indicates an area above the market where the selling pressure overcomes the buying interest. Usually a resistance is identified by a previous peak. For an uptrend to continue, each successive low (support level) must be higher than the one preceding it. Each rally high (resistance level) must be higher than the one before it. If the corrective dip in an uptrend comes all the way to the previous support area, this could be an early indication that the trend is weakening. In an uptrend, if support levels are violated, it could indicate that a trend reversal from up to down is likely.

Trend Lines

An uptrend line is a straight line drawn upward along successive reaction lows (Support areas). This forms a tentative trend line. The trend line is validated if it successful tested in the future.

A downtrend line is drawn downward along successive reaction peaks (resistance areas). Trend lines are useful if there is evidence of a trend already in existence. Traders tend to use trend lines as points of buying or selling.