Resist TrendlinesTechnical Analysis
Downwards sloping trendlines drawn above trending price action are also known as resist trendlines. When accurately drawn, these trendlines mirror trendlines drawn by multiple institutional and retail traders. When the asset price reaches the trendline, both groups of traders selling shares increasing supply and price. This results in the trendline “resisting” the price. The more times price hits the trendline without breaking, the higher the significance and validity of the trendline.
Price needs to have at least two highs to draw a resist trendline, but since the trendline slopes downwards each high must be lower than the previous high. The third touch confirms the accuracy of the trendline if the line does not have to be redrawn to achieve the confirmation. Some traders use two touches to confirm resist lines, but this contains higher risk since the third touch may break the perceived trend.
The more times the line is touched, the higher the confirmation and validity, and the higher the confidence level other traders (who know about the trendline) will trade the security or asset. Each new touch “proves” their belief in line correct, but if the line breaks and remains above the resist trendline, the line is broken and should be considered invalid.
If this break does occur consideration should be given to exiting trades which rely on continued price declines, especially if one bar closes and another bar opens above the resist line. A resist trendline’s strength is broken when traders holding long positions see price break the trendline and begin buying even more of an asset. Their purchases occur at steadily higher prices.
Another careful consideration is the length of the breakout. As the length of your trendline break increases, the chance of your trendline break being true increases. A breakout with a longer length has a greater chance of not respecting the prior trend.
Resistance to Support Reversal
You usually should not delete resist trendlines when they are broken, since these lines usually become support lines. As traders see price fall towards a broken prior resist trendline, they may buy assets or at least stop selling. This slows downwards momentum as it approaches the previous resistance line. A decrease in willingness to sell the asset or short the asset will help form a trough as buyers start purchasing. This converts the resistance line into a support line.
A weakening or slowing in momentum will become more obvious in oscillators. If a bullish divergence forms approaching the former support trendline, it indicates an increasing likelihood buying will happen at the prior resist trendline. The completion of the divergence will make it more obvious that it has turned into a support trendline. If a second trough forms above the prior resist trendline, the transition to a support line is confirmed.
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