Support, resistance and trends
Support and resistance are zones where the price has stalled before; trends, the underlying direction. Together they're a chart's basic map.
If you look at any stock's chart, you'll see the price doesn't move entirely at random: there are zones where it has bounced several times and zones where it has stalled. Technical analysis calls them support and resistance.
Support
A support is a price zone where, in the past, the decline stopped because buyers showed up. The more times it has bounced there and with more volume, the more relevant it's considered.
Resistance
A resistance is the opposite: a zone where the rise stalled because sellers showed up (for example, those who bought higher and were waiting to "break even").
When they break, they switch roles
If the price breaks a resistance strongly and holds above it, that zone often becomes support: those who sold there are now willing to buy back. And broken support often becomes resistance. A breakout with high volume carries more weight; one that quickly reverses is called a "false breakout".
Trends
| Trend | What it looks like | What it means |
|---|---|---|
| Uptrend | Higher highs and higher lows | Buyers are in control |
| Downtrend | Lower highs and lower lows | Sellers are in control |
| Sideways | The price goes back and forth between support and resistance | Balance or indecision |
A trendline connects the rising lows in an uptrend (or the falling highs in a downtrend). As long as the price respects it, the trend continues; if it breaks, it may be the first sign of a change.
Channels and chart patterns
- Channel: two parallel lines, a trendline and another along the highs (or lows), between which the price moves.
- Triangles: the range keeps narrowing until the price breaks out to one side.
- Double top / double bottom: the price hits the same resistance (or support) twice without breaking it, which sometimes foreshadows a turn.
- Head and shoulders: three peaks, the middle one highest; associated with the end of an uptrend.
What people use them for
- To decide where to place a limit order to buy (near support) or sell (near resistance).
- To define where to exit if wrong (a stop below a support).
- To know the context a stock is in: buying in a downtrend isn't the same as in an uptrend.
Test what you learned
1. What is a support?
- A zone where declines have stopped
- The all-time high
- The stock's dividend
Show the answer
A zone where declines have stopped. Buyers have shown up there before.
2. A stock breaks strongly through resistance at $110 and holds above. What tends to happen with that zone?
- It disappears
- It can become support
- It becomes stronger resistance
Show the answer
It can become support. Broken levels tend to switch roles.
3. What does an uptrend look like?
- Higher highs and higher lows
- Lower highs
- A price that doesn't move
Show the answer
Higher highs and higher lows. Each bounce starts higher than the previous one.
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Everything in this section is educational: it explains how investing works, it doesn't tell you what to buy.