Ch4. Support, Resistance & Chart Patterns — Trend Lines and Triangles

Overview: Prices the Market Remembers

Markets have price levels people remember. Price stalls and turns there repeatedly. Marking those spots with lines gives you support/resistance, and drawing along the direction of a trend gives you the trend line. The shapes these lines form are chart patterns.

Goal of this lesson: Learn the principles of drawing support/resistance and trend lines, and build entry/stop/target scenarios with classic reversal and continuation patterns.

1. Support and Resistance

Term	Definition	Psychology
Support	A price level where falling halts	”I’ll buy at this price” — waiting buyers
Resistance	A level where rising stalls	”I’ll sell at this price” — waiting sellers

Role Reversal

When resistance is strongly broken, it later turns into support. Conversely, broken support becomes resistance. Price often returns to “retest” a level it has just broken.

The more touches, the stronger. A line that has stalled price 3–4 times is far more reliable than one touched once. But the stronger the line, the bigger the move once it finally breaks.

2. Drawing Trend Lines

Uptrend line: connect the lows (HLs) sloping up → acts as support
Downtrend line: connect the highs (LHs) sloping down → acts as resistance
Channel: draw a parallel line to form a price corridor

Ascending channel:
        /   /   /  ← resistance (parallel)
      /   /   /
    /   /   /      ← support (trend line)

A break of the trend line (uptrend line breached) is the first warning of a trend reversal.

3. Reversal Patterns — The Trend Changes

Pattern	Shape	Meaning
Head & shoulders	Left shoulder, head, right shoulder + neckline	Up → down reversal
Inverse H&S	Flipped vertically	Down → up reversal
Double top	M-shape, two highs	Up → down reversal
Double bottom	W-shape, two lows	Down → up reversal

Head & Shoulders Scenario

After the head forms, draw the neckline.
When the right shoulder breaks the neckline downward → sell signal.
Target ≈ project the head-to-neckline height below the neckline.

A pattern is just a hypothesis until it’s completed (broken). Before the neckline breaks, a head-and-shoulders could be a simple range. The textbook move is to confirm completion before entering.

4. Continuation Patterns — The Trend Resumes

Pauses within a trend; the breakout usually continues the prior direction.

Triangle: range narrows to a point → resolves in the breakout direction
- Ascending (flat resistance + rising support) → usually breaks up
- Descending (flat support + falling resistance) → usually breaks down
Flag/pennant: a brief pause after a sharp move → resumes the prior direction
Rectangle (range): sideways within a band → breakout decides direction

5. Breakouts and False Breakouts (Whipsaws)

Not every breakout is real. False breakouts (whipsaws) — briefly crossing a line then snapping back — are frequent. Two clues to filter them:

Volume — a real breakout comes with volume (Lesson 5).
Closing basis — what matters is whether the close settles beyond the line, not a brief intraday poke.

Key Takeaways

Support/resistance are levels the market remembers; once broken, roles reverse.
Trend lines connect lows/highs; a break is the first warning of reversal.
Head-and-shoulders and double tops/bottoms are reversal patterns; triangles and flags are continuations.
A pattern is a hypothesis until completed by a breakout; estimate targets from pattern height.
Filter false breakouts (whipsaws) with volume and the closing basis.

Next lesson: We tackle volume head-on — how it confirms the truth of trends and breakouts, all the way to volume profile.