Know how support and resistance levels can be
penetrated by a change in investor expectations
(which results in shifts of the supply/demand
lines). This type of a change is often abrupt
and "news based."
this section, we'll review "trends."
A trend represents a consistent change in prices
(i.e., a change in investor expectations). Trends
differ from support/resistance levels in that
trends represent change, whereas support/resistance
levels represent barriers to change.
shown in Figure 19, a rising trend is defined
by successively higher low-prices. A rising
trend can be thought of as a rising support
level--the bulls are in control and are pushing
20 shows a falling trend. A falling trend is
defined by successively lower high-prices. A
falling trend can be thought of as a falling
resistance level--the bears are in control and
are pushing prices lower.
as prices penetrate support and resistance levels
when expectations change, prices can penetrate
rising and falling trendlines. Figure 21 shows
the penetration of Merck's falling trendline
as investors no longer expected lower prices.
in Figure 21 how volume increased when the trendline
was penetrated. This is an important confirmation
that the previous trend is no longer intact.
with support and resistance levels, it is common
to have traders' remorse following the penetration
of a trendline. This is illustrated in Figure
volume is the key to determining the significance
of the penetration of a trend. In the above
example, volume increased when the trend was
penetrated, and was weak as the bulls tried
to move prices back above the trend line.