Level of Resistance and Level of Support
If you observe a stock chart closely, you’ll find that there are certain price levels at which the graph seems to have got stuck and it has remained consistently at these price levels for a pretty long time, unable to move up or down. These points are significant for the overall analysis of the stock chart because these indicate the ability of the stocks of a company to overcome situations of crisis. The level of resistance is defined as the price level the stock is unable to break through or has done so with much difficulty. Similarly, the level of support is the price level below which the stock price seldom falls. If you observe that the stock price has overcome the level of resistance in more instances than one, then this shows that the stocks of the company have the potential to recover from crisis and it is relatively safer to invest in stocks of the company.
Volume
At the bottom of the stock chart, you’ll find a bar graph that represents the number of people who purchased stocks of the company over a period of time. If you find that more people were interested in the stocks when the prices were up, then it is a healthy trend and in stock market terminology, is referred to as bullish (bull signifies an investor who is of the opinion that the market will witness further growth). However, if the number of interested people decrease with the increase in the price of stocks, then the trend is termed as bearish (bear signifies an investor who thinks that the market will witness decline) and it is not advisable to invest in stocks that exhibit bearish trends.
Chart Patterns
In addition to studying the trends given above, you should also try and find any particular patterns on the chart. There are a set of pre-defined chart patterns that you need to look out for and these can either be continuation patterns or reversal patterns. Some of the common patterns found on stock charts are given below along with their meanings.
•Bullish Rectangle: The graph shows a continuous upward trend and indicates that the uptrend would continue.
•Wolf Wave: Graph is in the form of a wave and the price of the stock oscillates between the levels of support and resistance.
•Bear Flag: Indicates that the prices of stock will continue to go down.
•Flat Base: Indicates that the stock prices have remained stable for a substantial period of time.
•Double Top: The stock, having made two attempts to break through the resistance level, goes below the support level. It is a reversal pattern.
