and Trend Lines
some knowledge of technical analysis can benefit the average
investor. Technical analysis focuses on historic stock prices
and trading patterns, unlike fundamental analysis, which focuses
more on the trends in earnings and other financial ratios.
Some of the most basic areas of technical analysis encompass
trend lines, and support and resistance levels.
Technical analysts do most of their
work with stock charts that represent each day's stock move
with a vertical bar. Take a ruler and draw a line connecting
two specific points on the chart and you'll see the support
or resistance level for that stock. To plot the resistance
level, connect the stock's two highest highs or two highest
closing prices. The support level can be plotted in a similar
manner by connecting the stock's two lowest daily lows or
the two lowest daily closing prices. The resulting line can
have an upward or downward slope, or be horizontal. The resulting
line is also frequently referred to as a trend line. In
addition to charts where each vertical bar represents the
daily price movement of a stock, long-term trends can be seen
by using charts where each bar represents weekly, monthly,
or yearly data. In its simplest terms a support level
is the price where buyers come into the market keeping the
price from going lower. Buyers at this level believe the stock
is very attractively priced and should go higher. A support
level is like a floor stock prices usually bounces off of.
Conversely, a resistance level is the ceiling a stock price
can't seem to move above. The resistance level is where shareholders
or traders feel uncomfortable believing the stock is overvalued
and has much more short term downside potential than up side
Resistance, support, and trend lines
are used to try to predict near term future price movement.
A breakout above a resistance level is frequently a signal
a stock will move higher. A breakdown below a support level
can mean a stock will move lower, usually seeking the next
support level. Trend lines with a positive slope are obviously
more attractive than trend lines with a negative slope. Changes
in trends, can be a flag of opportunities to come.