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The study of market behavior using technical analysis begins with understanding the basics of price action. In price action, the first thing to understand is whether the markets are trending or are sideways. Trendlines support and resistance zones can help you understand this. These tools can be used for positional or intraday trading.
This blog highlights the use of trendlines and support and resistance zones in identifying trends.
What are Trendlines?
Trendlines are lines drawn on the price charts to obtain the best fit for key price points. These lines help in understanding the direction of the price move and also provide an indication of a trend change. Trendlines are of two types: Uptrend lines and Downtrend lines.
Uptrend Lines
An uptrend is a series of higher highs and higher lows. An uptrend line is a line that connects two or more higher lows. This line provides a clear direction of the prevailing trend. For example, as can be seen on the weekly price chart of Apollo Hospitals Limited, the stock is in a consistent uptrend, as shown by the blue trendline.
Source: Tradingview; Apollo Hospital Limited, Weekly chart
The uptrend line can also act as a line where the price usually takes support in an uptrend. If the uptrend line is breached and the price falls below it, this can be an early warning of an upcoming downtrend.
Downtrend Lines
A downtrend forms when the price makes a series of lower highs and lower bottoms. The line that connects the lower tops is called the downtrend line, and it gives a clear visual representation of the downtrend.
For example, as you can see on the daily chart of the Nifty 50 index, it shows a clear downtrend, as shown by the blue downward trendline.
Source: Tradingview; Nifty 50 Index, Daily chart
The downtrend line can also act as a line where the price usually takes resistance in a downtrend. If the downtrend line is breached and the price moves above it, this can be an early sign of a trend change.
What is a Support Level?
A support level is a price level or zone where there is a very high number of buyers present, and prices bounce back from these levels at least more than two times.
For example, as can be seen on the weekly chart of Berger paints, the price has taken support on the ₹440 – ₹450 support zone thrice, making it a strong support area for this stock.
Source: Tradingview; Berger Paints Limited, Weekly chart
If the support zone is breached, it means the buying was not enough to absorb the selling pressure. In that case, the price heads for the next support zone, and the current support zone becomes the new resistance zone. Support zones are used by traders to find new buying opportunities and place stop losses below these levels.
What is a Resistance Level?
A resistance level is the price zone where a huge number of sellers are present. This is the zone from where the prices get rejected more than two times.
For example, as can be seen on the weekly chart of Kotak Mahindra Bank Limited, the price has been rejected five times from the ₹1940 – ₹1975 zone, making it a strong resistance zone.
Source: Tradingview; Kotak Mahindra Bank limited, Weekly chart
If the price manages to move past the resistance zone, it indicates that the buyers have overtaken the selling pressure, and the resistance zone becomes the new support zone.
Resistance zones are used by traders to set profit targets for long positions or initiate new short positions.
Sideways Channels
Sometimes, the price action of a stock gets trapped between the support and resistance zone. This is a sideways price movement, and the price is neither in an uptrend nor a downtrend. This is called a sideways channel.
For example, as can be observed from the daily chart of Larsen and Toubro Limited, the stock has been in a support zone of ₹3,250 – ₹3,300 and a resistance zone of ₹3,800 – ₹3,850. Thus creating a sideways channel.
Source: Tradingview; Larsen and Toubro limited, Daily chart
If the price breaks out of the channel in any direction, it most likely moves in the direction of the breakout.
But as you can observe in the example given above, there is a false breakout (marked in blue). This is common in sideways channels, and a confirmation signal is required to confirm a breakout. This confirmation can be time or volume-based or based on any other technical indicator.
Limitations of Trendlines and Support/ Resistance Levels
Despite their widespread application in technical analysis, the trendlines and support and resistance zones have some limitations while incorporating them into intraday trading strategies. Every trade must know these limitations before using these tools:
1. Subjectivity: Drawing trendlines and support and resistance zones is not an exact science, and is subject to personal interpretation. Every trader can draw different trendlines and support and resistance zones on the same chart, leading to different outcomes.
2. False Breakouts: Trendlines and Support resistance levels can have a number of false breakouts. The price action does not respect these levels in a perfect way. Sometimes, prices can temporarily breach these trendlines and support/ resistance zones and can lead traders into wrong trades and thus failure of intraday trading strategies.
3. Lack of Predictive Ability: These technical analysis tools are better used for understanding and reading the mood of the markets than trading signals. Trendlines and Support resistance zones do not have predictive power; they just show the most probable outcomes.
4. Constant Adjustment: With changes in prices, the trendlines and support resistance zones also change, making them less stable than expected.
Conclusion
While trendlines and support/resistance zones are helpful in price action analysis, relying solely on them can be risky. Combining them with other indicators like moving averages or RSI adds more confirmation, making your intraday trading decisions more reliable and well-informed. This approach reduces the chances of false signals.
DISCLAIMER: This article is not meant to be giving financial advice. Please seek a registered financial advisor for any investments.
- Nifty 50 Forecast: Is the Market on the Verge of a Breakout or Breakdown? - February 24, 2025
- Intraday Trading: 3 Powerful Secrets to Master Trendlines & Support/Resistance for Bigger Profits! - February 24, 2025
- A Guide to Reversal Chart Patterns - February 20, 2025
