Basics of Trend, Support & Resistance

In our previous article, we explained the rationale behind trend. It’s a pattern identified by technical analysts to predict future price movements of a security. In the example that we covered in last article, we stood at a signal for 2.5 hrs to identify various trends. Similarly, we can analyze any stock for a specific time period to study and identify trends. For better understanding, we recommend reading the above article before going ahead.

Trend: A trend is defined as a general pattern or direction followed by price of a stock in a specified time period. As discussed in the previous article, a stock price never moves in a straight line. It generally follows a random pattern with successive highs and lows. But over a period of time, price of a stock can move up or down. If the price seems to be heading upwards, it’s called an uptrend. If the price seems to be heading downwards, it’s called downtrend. It might also happen that we are not able to recognize any pattern, as happened in the middle portion of the chart that we explained in last article. Usually, a trend is classified as a long term trend, if it lasts for more than a year. Short term trends are the ones which last for around 1-2 months. There could be multiple short term trends in a long term trend. A stock might be in a long term uptrend which has been observed over the last 5 years, but currently experiencing short term downtrend due to factors which are not expected to last long.

Support and Resistance: We obtained resistance by joining all the highs and support by joining all the lows, in the chart created in previous article. As seen in the chart, no. of cars moved between these two lines. Similarly, when we plot support and resistance by joining lows and highs of a stock price and determine a trend, we expect the stock price to move between these two lines. If the stock price moves below the support line, it means that the trend has been broken and there is excess downward pressure on the stock. Similarly, when stock price moves above resistance, again trend has been broken and there is excess upward pressure on the stock. In an uptrend, this could happen because the speed of increase in no of people interested in buying stock has increased. Suppose in our previous example, instead of 30 cars coming and joining the queue in every 5 mins, 40 cars are coming and joining the queue after 6:30 pm. In this case we would get the following chart. We can easily see how the resistance is broken and line depicting no of cars move out of trend due to excess upward pressure. Same thing can happen with a stock price, when the speed of increase in no of people interested in buying stock increases.

We defined price and volume as the two important indicators tracked and studied by technical analysts. Read our next chapter to understand how volume is used in technical analysis.