One of the most important concepts in technical analysis is that of trend. A trend is really nothing more than the general direction in which a security or market is headed.

• An uptrend is a situation in which we experience rising prices in the form of new highs and shallow pullbacks.
  
  To draw an uptrend line, a technician draws a line connecting the lows of the price chart.

• Similarly, a downtrend has lower peaks and prices continue to make new lows. To draw a downtrend line, a technician draws a line connecting the highs of the price chart.
  

• When a security is not trending, it is moving in sideways movements. It indicates a relative balance between supply and demand.

The price of a security seldom moves above resistance or below support.

• A support level is the price range at which a technician would expect a substantial increase in the demand for a stock. It tends to develop after a stock has experienced a steady decline from a higher price level.
• A resistance level is the price range at which a technician would expect an increase in the supply of stock and any price increase to reverse abruptly. It will develop after a stock has enjoyed a meaningful price increase and begun to experience profit-making.

Round numbers like 10, 20, 35, 50, 100, and 1,000 tend be important in support and resistance levels because they often represent the major psychological turning points at which many traders will make buy or sell decisions.

The change in polarity principle says that a prior resistance level, once broken, should become a new support level.

Practice Question 1

A downtrend is when a security makes ______ lows and ______ highs.

A. lower; higher
B. lower; lower
C. higher; lower

Correct Answer: B

In technical analysis, it is the movement of the highs and lows that constitutes a trend. For example, an uptrend is classified as a series of higher highs and higher lows, while a downtrend is one of lower lows and lower highs.

Practice Question 2

To draw an uptrend line, a technician draws a line connecting the ______ of the price chart.

A. lows
B. highs
C. average of daily lows and highs

Correct Answer: A

An uptrend line has a positive slope and is formed by connecting two or more low points. The second low must be higher than the first for the line to have a positive slope. Uptrend lines act as support and indicate that net demand (demand less supply) is increasing even as the price rises. A rising price combined with increasing demand is very bullish, and shows a strong determination on the part of buyers. As long as prices remain above the trend line, the uptrend is considered solid and intact.

Practice Question 3

A support level is a price level that ______

A. is highly likely for a stock price to fall below.
B. price will not rise above.
C. is unlikely for a stock or index to fall below

Correct Answer: C

A support level is a price that it is highly unlikely for a stock to fall below.

Practice Question 4

The price range at which a technician would expect an increase in the supply of stock and any price increase to reverse is called a ______.

A. resistance level
B. moving-average line
C. relative-strength line

Correct Answer: A

Practice Question 5

An uptrend is when a security makes ______ lows and ______ highs.

A. lower; higher
B. higher; higher
C. higher; lower

Correct Answer: B

An uptrend for a security is when the price goes to higher highs and higher lows.

Practice Question 6

To draw a downtrend line, a technician draws a line connecting the ______ of the price chart.

A. lows
B. highs
C. average of daily lows and highs

Correct Answer: B

As the security moves down in price, each subsequent new high must be lower than the prior high.

Practice Question 7

The price range at which the technician would expect a substantial increase in demand for a stock is called a ______.

A. resistance level
B. support level
C. moving-average line

Correct Answer: B

Support is the price level at which demand is thought to be strong enough to prevent the price from declining further. The logic dictates that as the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below support.