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Technical Primer: Why Trend Line Support Matters

Stocks in this article: NG FNM

2. Trend Line Support

Another common form of support is trend line or trend channel support -- support that takes place along a trend line that's anything other than horizontal. Take a look at the chart below to see an example:

In this chart, there's a clearly defined support and resistance level (in this case, they're parallel, so they're known as a trading channel), but it's uptrending. If you were a buyer of NovaGold (NG), it'd make sense to pick up shares of the stock when it was right around support, since those levels get you filled at lower (and more profitable) share prices.

3. Moving Average Support

The moving average, essentially a line that represents a stock's average price over a trailing period of days, is a very important indicator on any technical chart. Commonly, moving averages act as support and resistance, acting as price floors and ceilings depending on which side of the moving average the stock's price level is on. Take a look at how the 200-day and 50-day moving average acted as support for the S&P 500 in late 2009:

When it comes to moving averages, it's important to remember that more days means a stronger support or resistance level. In other words, the 200-day moving average is a more reliable support level than the 50-day.

The Value of Confirmation

Whether you're a burgeoning technical trader or an old-school fundamental investor, technicals can provide value for your portfolio by helping you get into positions at the best short-term levels.

With all the value that support can provide, it's important not to fall into the trap of believing that a stock will always obey its support levels. Breakdowns and breakouts are inevitable, which is why you always need to wait for confirmation before taking a technical trade. In short, confirmation means that you wait for the technical pattern to be tested before you sink your money on the line. Often, abstaining from trading for a tick or two will significantly increase the number of successful trades you see.

Like nearly any element of investing, technicals require experience before you can expect to cash in on repeatable returns. In the meantime, you can hone your technical skills by keeping on top of the weekly analysis on Stockpickr.

-- Written by Jonas Elmerraji in Baltimore.

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Follow Stockpickr on Twitter and become a fan on Facebook.

At the time of publication, author had no positions in stocks mentioned.

Jonas Elmerraji is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.
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