Technical analysis of stocks involves studying price, volume and other factors in an attempt to detect patterns that may be clues to the next stock price movement. There is no foolproof method to accurately predict stock movements, but technical analysis, in conjunction with other research, may lower the risk of making a wrong investment. One popular technique of detecting future stock movement is the drawing of “trend lines.”
Print a price chart of the stock for which you want to predict a price movement. Set the time interval to cover the past several months.
Lay a ruler along the lowest points (price dips) on the chart so that at least two low pivot points touch the ruler’s edge. Draw a line along the ruler’s edge. This is a “trend line” that shows a price support trend. In the future, when the stock price drops and touches this support line, it may indicate a reversal in price movement from down to up is about to occur.
Lay a ruler along the highest points on the chart so that at least two high pivot points touch the ruler’s edge. Draw a line along the ruler’s edge. This line represents a resistance level, which the stock struggles to rise above. In the future, when the stock price rises to touch this line, it may indicate a change in price movement from rising to falling.
Draw similar lines in the opposite directions (pointing downward) for stocks that are in a downward trend.
The indications of support and resistance trend lines are more trustworthy when three or more pivot points touch a line and when the trend line is less steep.
Dan Keen is the publisher and editor of a county newspaper in New Jersey. For over 30 years he has written books and magazine articles for such publishers as McGraw-Hill. Keen holds a degree in electronics, was chief engineer for two radio stations and taught computer science at Stockton State College.