Oblique resistances and supports: the basis of trends and channels

Though such figures are quite easily recognisable on an
horizontal level, since often corresponding to psychological or technical
thresholds, this is not the case for oblique supports and resistances,
i.e. trend lines.

Indeed, it is often possible to have oblique lines appear,
on which the stock bumps (resistance) or rebounds (support), as
shown by both graphs opposite. The predictive interest of trend lines lies in
the ability to thus determine targets on the up and down sides and to
optimise one’s timing.

It is even possible to identify parallel combinations of
these lines, forming channels, heading up or down (cf. graphs). The
price thus comes bumping under the upper part of the channel and landing on
its lower part.

These trends are often extremely strong and express the
memory of markets, as channels can be valid simultaneously on the short and
long terms. The power of these trends explains that, whenever they come to
an end (we say that the channel is “broken”, often down for an upward channel
and up for a downward channel), a strong volatility occurs, which can lead the
stock to enter a reverse trend. This situation can be preceded by the evolution
of the stock in intermediary zones or channels of the channel, thus suggesting
that the tendency is about to be invalidated (cf. graph).

Though it is quite difficult, when there are no obvious signs
(horizontal resistance, intermediary channel, …), to forecast the moment the
price will exit the channel, it is still possible to estimate the extent of
the following move. The occurring principle is simple: just move the
channel width where the price exited the channel in the exit
direction.

Channels can also be found in a horizontal
configuration; then they are called “range”. These figures indicate a
little enthusiastic market concerning the variation direction of the
stock or the index.

This latter is then evolving around a horizontal mid level.
Whenever these ranges are broken (and it is then less obvious to determine the
new direction compared to the case of a tendency channel), the target is defined
as other channels, by moving the channel width at the exit point in the
direction the stock took.