Resistance Trendlines Are Important Too

One of the first things they teach us in Technical Analysis Kindergarten is how to draw trendlines. Typically we'll take a low and line it up with the next low. Once we have a third test of this trendline, most technicians would consider it to be an important level. I know I do.

"The basic trendline is one of the simplest of the technical tools employed by the chartist, but is also one of the most valuable. An up trendline is a straight line drawn upward to the right along successive reaction lows....a down trendline is drawn downward to the right along successive rally peaks"

- John Murphy

Here's a good example of an up trendline:

In this case, we are drawing a line connecting support levels within an uptrend. The up trendline represents support, or demand for a given security. But many times I see the resistance within that very same uptrend being ignored. Today I want to focus on connecting the resistance points in an uptrend to try and identify potential resistance, or supply, in the future. This is what it looks like:

Here is a chart of the S&P500 that I've been pointing to for over a month. What I did here was simply connect the resistance points along the way. As it turns out there are two different slopes here that connect at the exact same place. This is why I'm not surprised that the S&P500 is selling off pretty hard from these levels:

The longer trendline connects all of the major levels of resistance since 2009 starting with the first peak in the Summer of 2010 followed by the peak in the Spring of 2011. That trendline takes us to the top last month. Meanwhile, you can see the short-term steeper resistance line connecting the top from early 2012 all the way through last month's top. With both of these intersecting trendlines, I find the risk/reward to be very much skewed in favor of the bears. I simply can't be putting new money to work on the long side with all of that going on.

I do my best to define uptrends by connecting support levels. But I believe lining up the resistance points along the way also adds value. I think now is as good of a time as any to point out how helpful this tool can be. It's one of the simplest ways to define trends, calculate price targets, and find resistance levels whenever we're in uncharted territory. So far this resistance is working very nicely.

Related Posts:

A Few Ways Fibonacci Can Be Helpful (September 5, 2013)

Relative Strength Index Explained - RSI (November 12, 2011)

Tags: $SPY $STUDY