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high. The line should not pass through prices in between the two low points. This line shows the line of support for the trend. |
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Resistance lines. Within the period you have selected, start a line from the highest high, draw it up and to the high point preceding the lowest low. The line should not pass through prices in between the two high points. This line shows the line of resistance for the trend. |
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Now that you know where support and resistance are, what do you do? Some of the easiest profits you will ever make come from buying when prices approach a support level and selling when prices approach a resistance level. |
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One of two things can happen when a trend comes to an end: |
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A trend can end in a reversal. The price can change direction and start a trend in the opposite direction from the previous trend. The strength shifts from the buyers to the sellers, or vise versa. Figure 12.16 shows a very clear and dramatic reversal. |
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Another way that a trend can end is in consolidation. Rather than establishing a trend in the opposite direction, price movement ''pauses" and prices remain relatively flat, as shown in Figure 12.17. During consolidation, the market is unwilling to establish a new direction. Neither the buyers nor the sellers are willing to step up and take control. |
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Where can prices move after they break out of consolidation? Prices can move in only two directions: |
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1. Continuation. Prices will continue in the direction they were moving prior to the consolidation, or |
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2. Reversal. Prices will move in the opposite direction. |
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The chart in Figure 12.17 shows these two possible breakouts from consolidation. |
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