Support, Resistance & Trend Analysis
Understanding support, resistance, and trends is fundamental to technical analysis. These concepts help you identify where price is likely to react and in which direction it's most likely to move.
What is Support?
Support is a price level where buying interest is strong enough to prevent the price from falling further. Think of it as a "floor" that the price bounces off.
At support levels, buyers see value and step in to buy. Traders who missed the previous bounce may place buy orders. Short sellers may take profits. This combined buying pressure stops the decline.
How to Identify Support
- Previous lows where price bounced
- Areas with multiple touches (more touches = stronger)
- Round numbers (psychological levels like $50,000)
- Previous resistance that became support after breaking
- Moving averages that price respects
What is Resistance?
Resistance is a price level where selling pressure is strong enough to prevent the price from rising further. Think of it as a "ceiling" that pushes price back down.
How to Identify Resistance
- Previous highs where price reversed
- Areas with multiple rejections
- All-time highs (ATH) - major psychological resistance
- Previous support that became resistance after breaking
- Key Fibonacci retracement levels
Price bouncing between support (green) and resistance (red) levels
Support/Resistance Flips
One of the most important concepts: when support breaks, it often becomes resistance, and vice versa. This is called a "role reversal" or "flip."
After a breakout, wait for price to "retest" the broken level. If resistance breaks and price pulls back to test it as support (and holds), that's often a good entry point with a clear invalidation level.
Understanding Trends
A trend is the general direction in which price is moving. Identifying the trend is crucial because "the trend is your friend" - trading with the trend has higher probability of success.
Types of Trends
Drawing Trendlines
Trendlines are diagonal lines drawn on a chart to visualize the trend direction and identify potential support/resistance.
How to Draw Trendlines
- Uptrend: Connect at least two higher lows with a line
- Downtrend: Connect at least two lower highs with a line
- The more touches, the more valid the trendline
- Use candle bodies or wicks consistently
Uptrend trendline (left) and downtrend trendline (right)
Chart Patterns
Chart patterns are formations that appear on price charts and can signal continuation or reversal of the current trend.
Reversal Patterns
Signal that the current trend may be ending:
Head and Shoulders
Three peaks with the middle one (head) being highest. The line connecting the two lows is the "neckline." A break below the neckline confirms reversal.
Double Top / Double Bottom
- Double Top: Two peaks at similar levels - bearish reversal
- Double Bottom: Two valleys at similar levels - bullish reversal
Continuation Patterns
Signal that the trend will likely continue:
Triangles
- Ascending Triangle: Flat top, rising bottom - usually bullish
- Descending Triangle: Falling top, flat bottom - usually bearish
- Symmetrical Triangle: Converging lines - breakout either direction
Flags and Pennants
Short consolidation patterns that form after a strong move. They look like small rectangles (flags) or triangles (pennants) that slope against the trend. Usually continue in the original direction.
• Wait for confirmation (breakout) before entering
• Patterns fail often - always use stop-losses
• Higher timeframe patterns are more reliable
• Volume should increase on breakout
Fibonacci Retracement
Fibonacci retracement levels are horizontal lines that indicate potential support and resistance based on the Fibonacci sequence. Traders use them to identify potential reversal points during pullbacks.
Key Fibonacci Levels
| Level | Significance |
|---|---|
| 23.6% | Shallow retracement - strong trend |
| 38.2% | Common retracement level |
| 50% | Not a true Fib number but widely watched |
| 61.8% | "Golden ratio" - very important level |
| 78.6% | Deep retracement - last defense |
How to Use Fibonacci
- Identify a significant swing high and swing low
- Draw the Fib tool from low to high (uptrend) or high to low (downtrend)
- Look for price reactions at the key levels
- Combine with other support/resistance for confluence
🧠 Test Your Knowledge
1. When a support level breaks, it often becomes:
2. An uptrend is characterized by:
3. The 61.8% Fibonacci level is also known as:
📋 Lesson Summary
- Support is a price floor where buyers step in; resistance is a ceiling where sellers dominate
- When support breaks, it becomes resistance and vice versa (role reversal)
- Uptrends have higher highs and higher lows; downtrends have lower highs and lower lows
- Draw trendlines connecting swing lows (uptrend) or swing highs (downtrend)
- Chart patterns can signal continuation or reversal of trends
- Fibonacci retracements help identify potential reversal points (38.2%, 50%, 61.8%)
- Always wait for confirmation and use multiple tools together