Support, Resistance, and Trendline Construction
Core Definitions
Support and resistance are price levels where buying or selling pressure has historically concentrated. Trendlines connect multiple price points to visualize the direction and slope of price movement.
Support is a price level where buying interest has previously emerged, causing price declines to pause or reverse. When price approaches support, historical data suggests buyers may step in again.
Resistance is a price level where selling pressure has previously emerged, causing price advances to stall or reverse. When price approaches resistance, historical data suggests sellers may become active.
Trendlines are diagonal lines connecting two or more price points, typically lows in an uptrend or highs in a downtrend. They extend into the future to project where support or resistance may occur.
Identifying Support and Resistance Levels
Support and resistance levels derive from observable price history. The CMT Association methodology emphasizes using clearly defined criteria rather than subjective judgment.
Criteria for Valid Support Levels
A support level gains validity when:
- Price has reversed upward from this level at least twice
- The reversals occurred on separate occasions (not consecutive days)
- The level aligns with a round number or prior significant low
Criteria for Valid Resistance Levels
A resistance level gains validity when:
- Price has reversed downward from this level at least twice
- The reversals occurred on separate occasions
- The level aligns with a round number or prior significant high
Worked Example: Identifying Support
Stock ABC shows the following lows over three months:
- March 5: Low $48.25
- March 22: Low $48.10
- April 15: Low $48.30
- May 8: Low $48.15
These four data points cluster around $48.00-$48.30. The average of these lows is ($48.25 + $48.10 + $48.30 + $48.15) / 4 = $48.20.
A horizontal line at $48.20 represents the support zone. Because price touched this area four times without breaking below, the level demonstrates repeated buying interest.
Zone width calculation: The range is $48.30 - $48.10 = $0.20. A support zone of $48.10 to $48.30 acknowledges that support is rarely a precise price point.
Drawing Trendlines
Trendlines require at least two points for construction and three points for confirmation. The specific methodology matters for consistent results.
Uptrend Line Construction
An uptrend line connects two or more ascending lows. The rules:
- Start from a significant low (a swing low where price reversed)
- Connect to a subsequent higher low
- Extend the line forward
- Validate with a third touch if possible
Example calculation:
- Point A: April 1, Low $50.00
- Point B: April 15, Low $52.50
Time span: 14 days Price change: $52.50 - $50.00 = $2.50 Slope: $2.50 / 14 days = $0.179 per day
Projecting forward to April 29 (14 more days): Expected trendline value = $52.50 + ($0.179 × 14) = $55.00
If price touches $55.00 on April 29 and bounces, this third touch confirms the trendline's validity.
Downtrend Line Construction
A downtrend line connects two or more descending highs:
- Start from a significant high (a swing high where price reversed)
- Connect to a subsequent lower high
- Extend the line forward
Example:
- Point A: June 1, High $75.00
- Point B: June 15, High $72.00
Slope: ($72.00 - $75.00) / 14 days = -$0.214 per day
Projecting to June 29: Expected trendline value = $72.00 + (-$0.214 × 14) = $69.00
Trendline Angles and Sustainability
Trendline angle provides information about trend sustainability. Steeper angles often indicate unsustainable moves that may correct.
Angle calculation: If a trendline rises $10 over 20 trading days on a chart scaled at $2 per grid line and 5 days per grid line:
- Vertical rise: 5 grid units ($10 / $2)
- Horizontal run: 4 grid units (20 days / 5)
- Angle: arctan(5/4) = 51.3 degrees
The CMT curriculum notes that trendlines at 45-degree angles (1:1 ratio) historically show better sustainability than steeper angles. Angles above 60 degrees often precede sharp corrections.
Support Becoming Resistance (and Vice Versa)
A key principle in technical analysis: broken support often becomes resistance, and broken resistance often becomes support.
Worked Example: Stock XYZ traded with support at $40.00 for six months. On October 15, price broke below $40.00 and closed at $38.50.
When price recovered to $40.00 on October 28, the former support level acted as resistance. Price reached $40.15 but closed at $39.25.
Why this occurs: Traders who bought at $40.00 during the support phase are now holding losses. When price returns to $40.00, these traders may sell to break even, creating selling pressure at the former support level.
Measuring Price Objectives
Support and resistance levels help establish price targets using measured moves.
Measured Move from Breakout
When price breaks above resistance:
- Measure the distance from the most recent low to the resistance level
- Add this distance to the breakout point for a target
Example:
- Recent low: $45.00
- Resistance level: $50.00
- Distance: $50.00 - $45.00 = $5.00
- Price breaks above $50.00
- Target: $50.00 + $5.00 = $55.00
This projection assumes the buying momentum that carried price from $45.00 to $50.00 will continue for an equivalent move above the breakout.
Practical Considerations and Limitations
Zone Width
Support and resistance are zones, not exact prices. A practical approach:
- For stocks priced $10-$50: zones of $0.25-$0.50
- For stocks priced $50-$100: zones of $0.50-$1.00
- For stocks priced above $100: zones of $1.00-$2.00
False Breakouts
Not every break of support or resistance leads to a sustained move. False breakouts occur when price briefly pierces a level but quickly reverses.
Filter criteria to reduce false signals:
- Require a close beyond the level, not just an intraday penetration
- Require price to remain beyond the level for 2-3 consecutive closes
- Look for increased volume on the breakout
Trendline Validity Over Time
Trendlines lose predictive value when:
- Too many time periods pass without price touching the line
- The trend has been in place for an extended period (exhaustion)
- The line has been adjusted multiple times to accommodate price action
A trendline that requires constant redrawing provides less reliable information than one that has held consistently.
Stop Loss Placement
Support and resistance levels inform stop loss placement:
Long position (bought the stock):
- Place stop below support level
- Example: Support at $48.00, place stop at $47.50 (0.5% below support)
- Risk per share: Entry at $52.00, stop at $47.50 = $4.50 risk
Short position (sold borrowed shares):
- Place stop above resistance level
- Example: Resistance at $60.00, place stop at $60.50 (0.8% above resistance)
Trendline stops:
- For uptrend: Place stop below the trendline by a fixed percentage (often 2-3%)
- Calculate: If trendline value is $45.00, stop at $45.00 × 0.97 = $43.65
Multiple Timeframe Analysis
Support and resistance levels carry different weight across timeframes:
- Weekly chart levels > Daily chart levels > Hourly chart levels
A resistance level visible on both daily and weekly charts deserves more attention than one visible only on the daily chart.
Example: If daily analysis shows resistance at $55.00 and weekly analysis shows resistance at $55.50, the zone from $55.00 to $55.50 represents a significant resistance area.
Next Steps
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Select a stock and identify three historical support levels and three resistance levels using daily chart data from the past year.
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Draw an uptrend or downtrend line connecting at least three points, calculate the slope, and project where the trendline will be in 10 trading days.
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Find one example of support becoming resistance (or vice versa) in a stock you follow, noting the specific dates and prices involved.
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Document a stop loss level for a hypothetical trade, showing the calculation based on support or trendline position.
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Compare support and resistance levels across daily and weekly timeframes for the same security to observe how levels differ in significance.