Reading a Stock Market Chart

A stock market chart or “stock chart” is at the heart of technical analysis, offering a way to review the price details of a stock. It is essentially a chart that contains a sequence of prices plotted over a period of time. It is one of the easiest ways to gain a visual understanding regarding the price trend of a stock.

Technical analysis of stock charts seeks to uncover various chart patterns in price movements. Many agree that, as human behavior repeats itself, these chart patterns become useful tools in forecasting price movements.

Defining Support and Resistance

A stock chart can offer you several guidelines in predicting the future direction of a stock price. The most basic of these are support and resistance which represent key points where the forces of supply and demand converge.

Support is the price level at which demand is perceived to be strong enough to thwart the price from further decrease. The belief is that as the price declines toward the support level, there is more inclination to buy and less to sell. By the time the price reaches the support threshold, it is believed that demand will surge and prevent the price from falling below the support level.
Resistance, on the other hand, is a price level where selling pressure overcomes buying pressure and a price advance is turned back.

When a resistance level is broken through, that price becomes a new support level. Similarly, when a support level is broken through, that price becomes a new resistance level.

Finding Support and Resistance Levels

Support and resistance levels are never exact numbers. While some argue that a support or resistance level is broken if the price is beyond that level at market close, this may not always be the case. In hindsight, it is often observed that the market was just testing these thresholds while staying within a zone that is the support or resistance level.

Drawing horizontal trend lines along price highs and lows can help identify support and resistance levels. These trend lines require the occurrence of at least two highs or two lows in the same region to be made valid. The trend lines become more valid the more times the price touches them.

Watching for Traders’ Remorse

Please note that it is not uncommon, after the stock price has broken through to a new level, for the price to return to its original level of support or resistance as traders question the validity of the break-through. If the price threshold is broken on trading volume that is heavier than normal, though, it is more likely that the new range will be accepted as valid.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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