Technical Analysis for Stock Investors: Watching the Channel for Resistance and Support - dummies

Technical Analysis for Stock Investors: Watching the Channel for Resistance and Support

By Paul Mladjenovic

The concepts of resistance and support are critical to technical analysis the way tires are to cars. Stock investors can watch channel lines to glean important information. Where 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.

Chart showing a channel.

This is 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).