Question

One of the most widely believed patterns observable in stock price charts is that if a trend is portrayed by the chart,

Group of answer choices

the trend will continue.

the trend will stop.

the trend will reverse itself.

none of the above.

Answer 1

Answer:

the trend will continue

Reason:

Trendlines, also known as bounding lines, are lines drawn on a stock chart that connect two or more price points. Since stock prices tend to trend, trendlines that connect the highs or lows in the stock’s price history can help identify the current trend and predict what the stock price might do in the future.

Support Lines

When trendlines connect price lows, this is called a support line. When the stock price begins to approach the line drawn at a prior low, you can expect demand to increase as buyers anticipate a bounce higher from that point. Momentum traders and investors looking to capitalize on a trending stock might consider buying stocks near these levels. However, if the stock price does not bounce off this line, and breaks the support line instead, this is considered a sign of weakness. Lack of interest from buyers at this level is a sign something is wrong and the stock may be headed lower.

Aside from price, volume is the most important characteristic used to evaluate a stock’s behavior around support and resistance levels. As a stock’s price approaches a support line, selling volume should dry up as it approaches the key level and buying volume should pick up as it moves away. This is confirmation the support level is valid and the uptrend will continue. If the price dips below the support level, you should check the volume before reacting. If volume is low, it isn’t as significant as if there were heavily selling below the support level. If volume picks up as price drops below the trendline that may be a sign the trend is over.

Resistance Lines

When a trendline connects price highs, this is called a resistance line. When stock prices begin rising near a resistance line, short-term investors may sell shares or sell shares short as they anticipate the stock will struggle to trade higher than its previous high. When a stock approaches its prior high it creates an interesting psychological impact. Many investors will judge the stock as too expensive to purchase. However, if the stock is able to rise up through a resistance level on heavy volume, it should be looked at as a sign of strength. The amount of demand for the stock may be so high that it overwhelms the psychological impact of the resistance level. Many investors use this behavior as a buy signal, since it is displaying exceptional strength. Furthermore, once a resistance line has been broken, it tends to become an area of support. Since the stock has proven demand at that level, it should not dip below that level while the current trend is intact.