I believe in technical analysis. I don’t believe it’s anything magic. And I think it’s more than just a “study of historical patterns with certain correlations”. I think it’s use is due to the relationship it has with market psychology.

For example, lets just take an uptrending stock. The stock moves up, and sells off, and then dip buyers come in, and the stock goes higher, and it’s overbought so some people short it, others take profits, and it pulls back and the dip buyers come in and the stock goes higher. A channeling stock will have more orderly selloffs, but an uptrending stock always has orderly buys on the dip. Buying on a dip, is a pyschological pattern, it is usually in an undervalued, growing stock, that is appreciating in value. When the stock takes a breather and doesn’t go up, dip buyers come in gungho, buying it with “both hands”. There’s no reason for a stock that people continue to buy, should break below the trendline. If it does, it’s because the dip buyers no longer are interested, usually because of some fundimental change. On it’s own, a trendbreak doesn’t mean too much, it could mean the dip buyers are on vacation, or needed to clear up some cash, or have short term concerns. However, if it sells below this trendline with VOLUME, it means the dipbuyers not only are done buying, it means they have now begun to SELL. So a trendbreak on increased selling volume is very bearish, because there no longer are dip buyers to bid the price up, and they are now sellers.

At the same time, you also might have people getting short the stock anytime it runs up, and taking profits at about the same point relative to where they got short near the top. If they are looking for a specific target, they will cover every time at the target. But either way, it’s like a battle back and forth. Since if the trend is up, the bulls are winning more battles, or at least there is more upside in being a bull and more strength. However, when the trendline breaks, the bulls have turned their back and ran, and now the bears control the shots. There’s usually enough dip buyers who don’t know how to do anything but be perma bulls on the stock, so that will cause a rally to the trendline where it will usually again fall and the retarded perma bulls that didn’t realize the story changed, are suddenly going to have to give up.

Now what about a downtrending stock? It’s the opposite. Now the bears are winning, those that short or sell the stock add more, everytime the stock rallies a little bit… Now if you have bears winning, and all of a sudden, the bears disappear and stop selling the rally, the bulls now have a fast break to the basket with no “defender” to stop them.

The above 2 examples only cover the “support” side, and what it means when support is broken.

Resistance is similar. Anytime you have a stock trending up and selling off in an orderly fashion, you have the general area that profits are taken. This can cause an uptrending stock to do different things, depending on what type of line it is. If the stock’s support line is steep, and the resistance is narrow, this makes what is known as an ascending triangle. It happens because less and less people are selling the stock, or they sell in shorter and shorter intervals, accepting less and less profit. This is a bullish pattern formation, because it means the shorts are running out of room. Either the bulls are outpowering them by gaining more bullish friends, or the bears are going soft, leaving and becoming less and less bearish. Regardless once the stock goes beyond resistance, usually on volume, the bears will probably go find somewhere else to play, and the bulls will all join in, and the shorts will cover and the momentum will take the stock higher, and perhaps form a new trend, that may be even more bullish. Of course, if the ascending triangle fails and the stock goes below support, it’s the same story as before, the bulls have stopped buying the dip, and the bears are now in control.

It’s like a game of reverse tug of war where the bulls are pushing it higher, and bears pushing it lower. Picture two people playing “king of the hill” If the bears win (break below support), they get to be king. If the bulls win (break above resistance), they get to be king. There are several indicators for how long they get to be king, and how dominant their reign is, but that’s the general idea of the psychology, or at least the way I see it.