Stock Trading Strategies > Technical Analysis > Chart Patterns

Support and Resistance in an Uptrend

Although the motivation is not the same, many of the same forces that lead to technical downtrends are also at work in the creation of the technical uptrend. These patterns occur because investors chasing a strong stock rationalize that paying a higher than their intended purchase price is warranted given the strength of the issue. The higher the stock price moves, the more likely it is that investors will rationalize why paying a higher price makes sense -- to a point. Some will argue this rationalization process is directly related to a perceived change in fundamental factors and very often this is true. Understanding technical analysis does not mean that fundamental factors should be dismissed. Consider the case of SLM Holding Corp. (SLM), a leading lender to students.

SLM Holding Corp. was one of the few issues to move significantly higher in the latter half of 2000. The stock emerged from a small base pattern in the middle of September at $45 and never really looked back. When this level was penetrated on better than average volume it became important technical support and buyers were more than willing to step-up and buy on every decline to that level. In early October SLM Holding tested support at $45 on three separate occasions. In each case the stock rallied briskly and after one such test in the middle of October SLM Holding began to trend so strongly that the stock nearly added 30-percent in just two weeks. That process lifted the stock to a new resistance point at $59. SLM Holding failed to push through the $59 level on two occasions but in early December volume surged and the share price easily moved beyond $59. Once again the result of the upside breakout was a significant near term rally. This time the stock rallied to $68.50 before sellers emerged. We have delineated the key support and resistance levels with green and red arrow respectively. These arrows reveal just how powerful is the role of support and resistance in the formation of a typical technical uptrend.

Conclusion

Support and resistance are price points where buyers and sellers have shown a willingness to buy and sell stock.
When support falters it becomes resistance. When resistance is eclipsed it becomes support. This occurs because weak hands (non-believers) are replaced with strong hands (believers).
Support and resistance play key roles in the determination of major trends creating "stair-step" levels where both buyers and sellers have shown a willingness to act.

O.K, we are through with the easy stuff, now it is time to pull it all together with the last basic concept, the importance of volume.

support and resistance in a downtrend the importance of volume