Learning Objectives

After studying this chapter the student should be able to understand:

• Formation of support and resistance lines
• Change of support to resistance and vice versa
• How to trade head and shoulders pattern
• Volume study in head and shoulders pattern
• Double top and double bottom
• The gap analysis

3.1 What are support and resistance lines?

Support and resistance represent key junctures where the forces of supply and demand meet. These lines appear as thresholds to price patterns. They are the respective lines which stops the prices from decreasing or increasing.

A support line refers to that level beyond which a stock’s price will not fall. It denotes that price level at which there is a sufficient amount of demand to stop and possibly, for a time, turn a downtrend higher. Similarly a resistance line refers to that line beyond which a stock’s price will not increase. It indicates that price level at which a sufficient supply of stock is available to stop and possibly, for a time, head off an uptrend in prices. Trend lines are often referred to as support and resistance lines on an angle.