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The Good and Bad of Technical Analysis for Stock Investors

A trend is the overall direction of a stock (or another security or a commodity), an important consideration for investors considering whether to get in, stay in, or get out of a particular market.

A trend’s length

With trends, you’re not just looking at the direction; you’re also looking at the trend’s duration, or the length of time that it goes along. Trend durations can be (you guessed it) short-term, intermediate-term, or long-term.

  • A short-term (or near-term) trend is generally less than a month.

  • An intermediate-term trend is up to a quarter (three months) long.

  • A long-term trend can last up to a year. And to muddy the water a bit, the long-term trend may have several trends inside it (don’t worry; the quiz has been cancelled).

Trendlines

A trendline is a simple feature added to a chart: a straight line designating a clear path for a particular trend. Trendlines simply follow the peaks and troughs to show a distinctive direction. They can also be used to identify a trend reversal, or a change in the opposite direction.

Here there are two trendlines: two straight lines that follow the tops and bottoms of the jagged line (which shows the actual price movement of the asset in question).

[Credit: Illustration by Wiley, Composition Services Graphics]
Credit: Illustration by Wiley, Composition Services Graphics

How to watch the channel for resistance and support

The concepts of resistance and support are critical to technical analysis the way tires are to cars. When the rubber meets the road, you want to know where the price is going.

  • Resistance is like the proverbial glass ceiling in the market’s world of price movement. As a price keeps moving up, how high can or will it go? That’s the $64,000 question, and technical analysts watch this closely. Breaking through resistance is considered a positive sign for the price, and the expectation is definitely bullish.

  • Support is the lowest point or level that a price is trading at. When the price goes down and hits this level, it’s expected to bounce back, but what happens when it goes below the support level? It’s then considered a bearish sign, and technical analysts watch closely for a potential reversal even though they expect the price to head down.

Channel lines are lines that are added to show both the peaks and troughs of the primary trend. The top line indicates resistance (of the price movement), and the lower line indicates support. Resistance and support form the trading range for the stock’s price.

The channel can slope or point upward or downward, or go sideways. Technical traders view the channel with interest because the assumption is that that the price will continue in the direction of the channel (between resistance and support) until technical indicators signal a change.

Check out the channel below; it shows you how the price is range-bound. The emphasis on trends is to help you make more profitable decisions because you’re better off trading with the trend than not.

[Credit: Illustration by Wiley, Composition Services Graphics]
Credit: Illustration by Wiley, Composition Services Graphics

Here you see a good example of a channel for a particular stock. In this case, the stock is zigzagging downward, and toward the end of the channel, it indicates that the stock is getting more volatile as the stock’s price movement is outside the original channel lines. This tells the trader/investor to be cautious and on the lookout for opportunities or pitfalls (depending on your outlook for the stock).

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