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Questions and Answers
In an uptrend, a downtrendline acts as a support line.
False
Support is the price level at which supply is thought to be strong enough to prevent the price from declining further.
False
A support line is established above the current price level.
False
Demand is synonymous with bearish and selling.
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When an uptrendline is violated, it acts as a support.
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Support always holds and prevents the price from falling below it.
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A break above resistance signals that the bears have won out over the bulls.
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Support breaks and new lows signal that buyers have increased their expectations and are willing to buy at even higher prices.
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Resistance lines/levels are below the current price.
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A break below support signals that the bulls have won out over the bears.
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Support turning into resistance means that the forces of demand have overcome the forces of supply.
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Trendlines are used to identify the direction of the movement of the stock prices.
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A downtrend is represented by a line connecting the high points of a security as its price continues to rise.
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When price breaks above resistance, then that resistance level becomes the new support level.
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Technical analysis is built on the assumption that prices are random and unpredictable.
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Once support is broken, another resistance level will have to be established at a higher level.
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A down trendline is drawn by connecting the low points of the security as it continues to fall.
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A sideways trend is a period of consolidation before the price moves in the opposite direction of the previous trend.
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The more times a trendline has been tested, the less significant it is.
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A steep trendline always indicates a strong trend.
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When price and volume patterns are in agreement, it indicates a strong trend reversal.
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Volume normally leads price during a bear move.
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A new high in price that is confirmed by volume is a warning of underlying technical weakness.
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Price increase and volume decrease is a bullish signal.
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Volume is always dependent on price.
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When volume trends are moving in the same direction as price, it is abnormal.
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Study Notes
Support and Resistance
- Support is the price level at which demand is thought to be strong enough to prevent the price from declining further.
- A break below support signals that sellers have reduced their expectations and are willing to sell at even lower prices.
- Once support is broken, another support level will have to be established at a lower level.
Resistance
- Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further.
- A break above resistance signals that buyers have increased their expectations and are willing to buy at even higher prices.
- Once resistance is broken, another resistance level will have to be established at a higher level.
Role of Reversal: Support and Resistance
- Support can turn into resistance and vice versa.
- A break below a support level can turn that broken support level into resistance.
- A break above a resistance level can turn that broken resistance level into support.
Trendlines
- Trendlines are a straight line drawn on a chart through or across the significant limits of any price range to define the trend of market movement.
- Trendlines are one of the first technical aspects of the market to be discovered.
Uptrend
- An uptrend is when a line is drawn on the chart by connecting the low points of the security as its price continues to rise.
- Each low point is successively higher than the previous low, giving the trendline its upward slope.
Downtrend
- A downtrend is when a line is drawn on the chart connecting the high points of the security as it continues to fall.
- Each high point is successively lower than the previous high, giving the trendline its downward slope.
Sideways Trend
- A sideways trend is a horizontal price movement that occurs when the forces of supply and demand are nearly equal.
- A sideways trend is often regarded as a period of consolidation before the price continues in the direction of the previous move.
Factors that Determine the Significance of a Trendline
- The longer the period, the more significant the consequences.
- The more times a trendline has been tested, the greater its significance.
- The steepness or slope of the trendline helps identify if the trend is significant or unstable.
Volume Studies
- Volume studies offer three major benefits:
- When price and volume patterns are in agreement, it favours an extension of the trend.
- If price and volume disagree, it tells us that the underlying trend is not as strong as it looks on the surface.
- Volume can throw up characteristics of its own that literally shout a warning or opportunity.
Price and Volume Relationship
- Volume typically goes with the trend, expanding in a rising market and contracting in a declining one.
- A combination of rising volume and rising price is normal, but a new high in price that is not confirmed by volume should be regarded as a red flag, warning of underlying technical weakness.
- Volume normally leads price during a bull move.
- A bullish signal is given when price and volume both increase, or when price and volume both decrease.
- A bearish signal is given when price increases but volume decreases, or when price decreases but volume increases.
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Description
Test your understanding of technical analysis by identifying support and resistance zones, trendlines, and volume characteristics in financial markets. Learn how to recognize key junctures where supply and demand meet and how to apply this knowledge to make informed trading decisions.
