In my last article, I wrote about how support and resistance work, how they look on a chart and also how to trade near support and resistance.
I would suggest you all read my last article named “Practical Approach to Technical Analysis” before reading this one for better understanding, the link for the same is provided at the end of this article.
Moving ahead, in this article, we will discuss two more concepts of Technical Analysis which are trend lines and change in polarity.
So let’s start with trend lines and how to analyze them,
Trend lines are basically the support or resistance lines which are diagonal (instead of horizontal) and are connected through pivot lows /highs showing the direction of price. If the trend line is drawn across support, it is known as a supporting trend line & if a trend line is drawn across a resistance, it is known as a resistance trend line. Trend lines are used to show direction and speed of price, i.e. Steeper the trend line, steeper and quicker the speed of price acceleration/deceleration.
So what do we get from these trend lines? If you are plotting a supporting trend line you will find Buy on dip level of the security, and if you are plotting a resistance trend line you will be able to find Sell on rise level. Let’s look at some charts to understand this well.
(Ashok Leyland, Time frame – 1 year, Daily Chart)
As you can see the price has bounced off the supporting trend line in Ashok Leyland, so next time the price comes near this line you can expect a bounce just like horizontal support, hence it works as a buy on dip level.
(Manappuram Finance, Time frame – 1 year, Daily Chart)
As you can see in the above chart the stock has fallen after touching or nearing the resistance trend line 4 times, so next time if the price comes near this line you can expect a sell-off and fall in price, hence this line provides with sell on rise level.
If a supporting trend line breaks we will see a fall, similarly, if a resistance trend line breaks we will see an up move.
Now let’s discuss what change in polarity is and how it looks on a chart?
Change in Polarity means when support breaks and then it might turn out to become a resistance later or when resistance breaks it might turn out to become a support level for future.
Let’s look at some charts to understand how it looks and works –
(MGL, Time frame – 2 months, Hourly Chart)
As we can see in this chart the price range of 1020-1040 was earlier acting as support but later when broken down, started acting like a resistance level for the stock.
(Titan, Time frame – 2 months, Hourly Chart)
As we can see, the price level of 1030 was acting as resistance earlier, but after breaking the resistance, the same price level of 1030 became a support for the stock.
Change in polarity can happen also in trend lines, where a supporting trend line after a breakdown, might act as a resistance for the stock.
The concept of change in polarity and trend line will help you to plot your chart better and take the entry or exit in position at the right time. Trend lines are widely used to find buy on dip levels and to accumulate the quality stocks for long term purpose.
Article on, “Practical Approach to Technical Analysis”
https://www.balancingaf.com/post/practical-approach-to-technical-analysis
Disclaimer: The data and charts presented are purely for educational purpose and do not imply any investment recommendation.
Write-up by: Nikhil Mahanandani
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