Channels and Markets: Price changes in stocks are thought to have short term ups and downs but tend to go in general directions for longer periods of time. They trade within what's called a channel. Channels are formed by a bottom line and a top line. The reliability of the these lines is formed by the number of times the stock hits the line and but then retreats, while staying within the channel. Stocks that begin to rise and pass through (or break) the top line, with higher than normal volume, are believed to have the momentum to continue rising and give great profits for growth investors. This is what happens in a bull market, or a market that tends to go up for a period of time. Let's look at a popular semiconductors stock that has been on the rise, Advanced Micro Devices (AMD).
Support and Resistance: The bottom line within the channel is often called a support line. Support lines can also be formed by the lowest close in the last few weeks or months, the 50 day or 200 day MA, The top line within the channel is often called a resistance line. Resistance lines can also be formed by the highest close in the last few weeks or month, the 50 day or 200 day MA.
But in a bull market when the channel is pointing upwards after a stock has traded within the bounds for a period of time if it breaks through the top then sell. It's at the top or near it.
Similarly when a stock passes through or breaks the bottom line, with greater than average volume, the stock is thought to have the momentum to continue downward and will very often continue to descend. This is what happens in a bear market, or a market that tends to down for a period of time. Bear markets are much shorter and more violent than Bull Markets because they are often accompanied by heavy volume, meaning lots of investors are pessimistic for growth and are scared and selling.
By predicting the bottom of the bear market traders find a wonderful time to buy their stocks and make the most profit. The bottom is often predicted by a great deal of volume but the stock doesn't fall any further. At other times the bottom can be indicated by a stock overcorrecting, meaning there was a great deal of downward movement with not a lot of volume or selling pushing it down. At these times it is oversold and will usually rise again rapidly.
Sideways Market: There is also what is called a sideways market. This is when a channel that a stock is trading in is more or less flat. In a sideways market ready to give way to a bull market often times a stock will stay within a certain price range for a few weeks until all the traders who wanted out actually get out at which time the buying overcomes the selling and since there is no longer the negative resistance the stock will break out of the channel and rise rapidly attracting new traders. Buy stocks in this category when they are just leaving this consolidation phase on volume, but not after it's up many days past the new base.
A similar phenomenon happens when a sideways market gives way to a bear market. The market may have reached a climactic high, came down and struggled for a few weeks or months to surpass previous highs and doesn't seem to be progressing. As soon as it breaks through the base on volume the sideways market usually gives way to a bear market attracting sellers and traders who short the market. At this time there is usually bad news in the media and investors are worried. The Stocks fall rapidly on high volume as traders panic. A good time to get out of the market would be the day when it breaks through the base on volume. Often you may see it start to go up again just enough for you to question your timing. Don't be fooled. These stocks generally continue to slip and slip and you'll be glad you got out. Below is shown sell signals from the Nasdaq.