2.1. Horizontal resistances and supports

The notion of supports and resistances is one of the key points of technical analysis. It is mainly based on the idea that buying and selling decisions are partly due, on both the individual and market levels, to psychological reasons.

Thus, thresholds effects can be very effective. A level is considered as a support if, every time a stock tries to break this threshold down, the stock does not achieve that and heads back up. If we take the example of Vivendi (cf. graph), we can see that the stock came on the 100 EUR level several times in April and May, therefore 100 can be considered as a support.

We also can find psychological levels on the upside, preventing the stock from rising above certain levels: they are then called resistances. We can for example identify a resistance in the 100 EUR area for Casino, as shown opposite.

However, these levels, once tested, can be crossed up or down and thus get the opposite function. For example, on the Alcatel stock, the 50 EUR was used to constitute a resistance. Still, it was finally crossed and turned into a support.

The existence of such figures is also due to the markets memory principle. Indeed, investors remind themselves of previous reversing points and are thus able, when approaching these levels, to act accordingly. These anticipations thus turn , and reinforce the strength of the threshold, support or resistance. In the support case, buyers are the ones recalling the previous situation and winning, while sellers outclass buyers in the resistance case.

2.2. 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.