Stockcharts – A Look at Trend Lines and Support and Resistance Levels
As you study stockcharts you learn how to perform technical analysis of the markets. Technical analysis is the forecasting of future price movements based on examination of past price movements. You are unable to form absolute predictions of what is happening in the stock market, but through reading stock charts, investors are able to foresee what is likely to happen to prices over time. Stock charts display a sequence of prices plotted over a specific time frame. The time frame can be displayed in a variety of ways including, intraday, daily, weekly, monthly, quarterly or annually. There are also four different charts that an investor can utilize to analyze stock market price movements. These include the line chart, bar chart, point and figure chart and the candlestick chart.
Regardless of the type of stock market charts that the investor decides to use, he or she will study support and resistance levels as well as trend lines. Support and resistance levels represent key moments in charts where supply and demand are concerned. Basically, when supply is low and demand is high, prices are driven up, and conversely, when supply is high and demand is low, prices decline. The word supply is used interchangeably with terms such as bearish, bears, and selling, while the word demand is used in place of terms such as bullish, bulls, and buying.
Trend analysis is a technical analysis tool that helps the investor to identify and confirm what is happening in the markets. When reading stockcharts a trend line is identified as a straight line that connects two or more price points. This trend line then extends into the future to act as a line of support and resistance. Trend lines consist of uptrends and downtrends and many of the principles that apply to trend lines are also applied to support and resistance levels. An uptrend line contains a positive slope and is formed by connecting two or more low points. To form an uptrend the second low must be higher than the first and as long as the prices remain above the trend line, the uptrend is confirmed. The downtrend line has a negative slope that is formed by two or more high points. The second high must be lower than the first, and as long as the prices remain below the downtrend line, the trend is confirmed. An uptrend line, displayed when stock charting, shows a strong determination of the buyers while a downtrend line shows strong determination of the sellers. In order for a trend to be valid, there must be a third point to confirm the trend. The rule of thumb is that the more points used to form the trend line, the more validity is attached to the support and resistance levels.
This article provides a very basic sneak peak at the use of trend lines and support and resistance levels to indicate what is happening in the markets. Through the use of stockcharts, investors are able to predict what they think is going to occur in the markets, and therefore act accordingly. When learning how to read stock charts it is necessary to have a complete understanding of trend lines and support and resistance levels before you can begin to trade stock.
Market Direction - Candlestick charts reveal an immense amount of information. The most relevant involves the identification of the reversal of investor sentiment. The information incorporated into each of the formations also work extremely well for identifying the 'lack' of change in investor sentiment. This allows for accurate evaluations of trend continuations. As can be seen in the Dow chart, the downtrend is clearly identifiable. The 'lack' of candlestick buy signals with confirmation remains the obvious element for the continuation of the current trend. This may seem very elementary bought it takes into account the commonsense facets built into candlestick signals.
The lack of a candlestick buy signal 'and' a lack of a close above the T-line creates a high probability scenario. The downtrend continues, there is no change of investor sentiment. That becomes much more valuable information than what it looks like on the surface. A question was asked in the chat room whether there were any short positions recommended during this decline. Obviously, there should have been. However, the benefit provided by candlestick analysis to show there is a continuing downtrend works just as well for identifying a continued uptrend. If it can be assumed that there is not going to be the normal market activity during the dog days of summer, establishing short positions when a number of the long positions in the portfolio were still producing bullish profits did not warrant rushing to change the direction of a portfolio.
The oil stocks and the mining stocks have been producing good profits during the market decline. The analysis of their uptrends was just as compelling as the analysis of the general market downtrend. To shift from stocks that were producing good profits and maintaining identifiable uptrends would not have made sense once the general market's had gotten to the oversold conditions. As illustrated in the Candlestick Forum's recommendation of SQNM, there had not been any candlestick sell signals or any close below the t-line during the markets decline over the past six weeks.
Will there be as many bullish potential positions in a declining market? Obviously not! However, the information built into candlestick signals allows for our scanning techniques to identify those fewer positions with a good deal of accuracy. Additionally, bullish sectors are usually going to act more powerfully in a declining market because everybody else can see that is the only place to have your funds. Prices move with much more force when everybody is concentrating on those sectors. Will you make as much money in all of the bullish positions during a declining market? Not necessarily, but if you can make moderate profits when the market is slowly languishing in a downward direction, those funds will be available to take advantage of other sectors when the reversal at the bottom finally occurs. Obviously this is not high intellect reasoning. It is merely applying common sense to investing.
The summertime usually produces market conditions that are not conducive to major trading activity. The candlestick investor has the luxury of being able to analyze what the general market is doing as well as what each individual stock is doing. Utilizing the simplistic visual analytical features that candlestick signals reveal makes for not only profitable trading but also a much more relaxed investment program. When the sun is out and the greens are soft, being tied to the computer screen is not a condition that most investors want to be regulated to during the summer. Candlestick analysis allows for shifts of investment strategies based upon an investor's trading activities. Use that to your advantage. If you take the time to learn the commonsense implications built into candlestick signals, you will be able to sleep well for the rest of your life.
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The Candlestick Forum Team
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