You will be able to describe a price trend and support and resistance levels without treating them as forecasts.
Marcus pulled up a five-year chart of Larkspur and noticed something he'd never looked for. Each time the price fell to around S$1.50 over the past two years, it stopped and turned up. Each time it rose towards S$1.80, it stalled. His first thought was that he'd found a pattern to trade. His second, after module 9, was to ask what the pattern actually described, and whether it said anything about next month.
Trend, support and resistance are the most basic tools of chart reading. Used carefully, they describe where buying and selling happened in the past. Used carelessly, they turn into forecasts the evidence doesn't support. All prices in this lesson are made up.
A trend is a sequence of higher highs and higher lows, for an uptrend, or lower highs and lower lows, for a downtrend. It's a description, and you can check it on any chart by circling the turning points.
Here is Larkspur's made-up path. During the FY4 downturn the shares fell to a low of S$1.30. They recovered to S$1.95, fell back to S$1.48, rose to S$1.78, fell to S$1.52 and now sit at S$1.60. Mark the lows: S$1.30, then S$1.48, then S$1.52, each higher than the last. Mark the highs: S$1.95, then S$1.78, lower than the first. Rising lows with falling highs aren't a trend in either direction. They describe a range that's been narrowing, with buyers stepping in a little higher each time and sellers stepping in a little lower.
That description is worth having, because it's more precise than "the shares have gone sideways". It isn't a forecast. A narrowing range ends with a move one way or the other, and the chart doesn't say which.
Support is a price area where buying has shown up before, strong enough to stop a fall. Resistance is a price area where selling has shown up before, strong enough to stop a rise. They're areas, not exact prices, because traders don't all place orders at the same cent.
There are plain reasons orders cluster at levels. Some investors who missed buying at S$1.50 last time leave limit orders there in case it returns. Some who bought near S$1.80 and watched the price fall want to sell when they can get their money back, which is the reference-point effect from Behavioural Finance: why you make the money mistakes you make, lesson 2.1, Gains and losses are judged from a reference point, and round numbers such as S$1.50 pull in orders of their own. Lesson 5.1, Exchanges, market makers and how your order gets filled, showed that the order book is a list of choices people have made. Support and resistance are where those choices bunched together in the past.
For Larkspur, Marcus marked support between S$1.45 and S$1.52 and resistance between S$1.75 and S$1.80.
Before giving a level any weight, test it. Count each time the price reached the area and note whether it turned back or went through.
Marcus counted four visits to the support area over five years. The price turned up three times and broke through once, during the FY4 downturn, when it fell to S$1.30. Of his three visits to resistance, the price turned down twice and broke through once, on the way to S$1.95, before falling back.
So the levels held five times out of seven. That sounds impressive until you ask what would have happened by chance. Prices that wander up and down will often reverse near wherever their recent turning points were, because that's partly how those turning points got drawn, and seven visits is far too small a sample to separate a real tendency from luck. The two breaks happened when the business news changed, a downturn and then a recovery in orders, which is a reminder that the levels gave way when the fundamentals moved.
The orders that made a support level last year may not be there next time. The investors who wanted to buy at S$1.50 may have bought, given up or changed their minds. The sellers waiting at S$1.80 may have sold. A level is a record of where orders sat, and order books change every day.
That's why chart levels shouldn't decide whether you buy or sell. A stock "at support" isn't cheap because of where it sits on a chart, and one "at resistance" isn't expensive. Larkspur at S$1.50 is worth whatever its cash flows are worth, which module 8 estimated at S$1.58 to S$2.08 in the central range, and the chart has no view on that.
Levels earn a modest role once a decision is already made. Suppose, after the work in modules 8, 9 and 11, someone has decided to add to a holding like Larkspur. A recent support area is a sensible place to rest a limit order, because sellers have accepted prices there before, so the order has a fair chance of filling without paying up. A resistance area is a place where a buy limit is less likely to be needed, because sellers have tended to appear there.
The cost of using levels this way is that the order may never fill. If the price never returns to S$1.52, a limit there buys nothing. That's an acceptable trade-off for an investor adding to a long-term holding, and lesson 10.7, Use a chart to time entry within a decision made on fundamentals, builds it into a written entry plan.
Choose one holding with at least five years of price history, open its chart, and get ready to mark the turning points, the trend if there is one, and the two price areas where it has most often reversed.
Mark the trend and two support or resistance areas on a five-year chart of one holding and note how often price respected them.
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