Table of Contents
- What Is a Horizontal Line?
- Understanding a Horizontal Line
- Fundamental Horizontal Analysis
- A Horizontal Line as It Relates to Supply and Demand Curves
- Example of How to Use the Horizontal Line in Technical Analysis
- The Difference Between a Horizontal Line and a Trendline
- Limitations of Using a Horizontal Line in Technical Analysis
What Is a Horizontal Line?
Let me tell you about horizontal lines in technical analysis: they're lines you draw on a price chart to spotlight areas of support or resistance.
In geometric terms, a horizontal line runs parallel to the x-axis, meaning every point on it shares the same y-value.
Key Takeaways
- You use horizontal lines in technical analysis to mark support or resistance zones.
- A horizontal line is parallel to the x-axis.
- In technical setups, draw it along swing highs where prices peaked similarly, or along swing lows for the same.
Understanding a Horizontal Line
You often see horizontal lines in technical analysis to point out support areas where prices stopped dropping and bounced back before, or resistance where they stopped climbing and fell.
To create a horizontal support line, connect similar swing lows in price. For resistance, connect the swing highs.
Once drawn, use this line for analysis or trading. If an asset's price bounces between support and resistance horizontals, it's range-bound.
A break below support might signal further drops, but if it holds and price rises, expect higher prices. The same goes for resistance: breaking above could mean gains, while rejection leads to watching for declines.
Simply put, on any chart, a horizontal line means equal y-axis values. If it's marking highs and a point goes above it, that shows a y-value increase over recent data.
Fundamental Horizontal Analysis
Horizontal analysis lets you compare values or prices across time, a key part of fundamental analysis where you look at earnings reports and statements over periods.
Here, time acts as the x-axis, helping calculate percentage changes to show the extent of shifts.
This analysis reviews financial statements over multiple periods against a base, displaying changes in dollars and percentages.
Calculate the percentage by dividing the dollar change from comparison to base year by the base year's value, then multiply by 100. For instance, if someone says revenues rose 10% last quarter, that's horizontal analysis at work.
Apply it to any financial item, like revenues or EPS, and it's great for comparing company performances.
A Horizontal Line as It Relates to Supply and Demand Curves
In supply and demand graphs, price is on the vertical axis and quantity on the horizontal. A perfectly horizontal line here means perfect elasticity, where demand reacts instantly to price changes.
If a perfectly elastic good's price goes above market level, demand drops to zero. Consumers just won't pay more than that specific price.
Example of How to Use the Horizontal Line in Technical Analysis
Drawing a horizontal line is one of the easiest technical analysis methods, but it gives you valuable insights. Take the SPDR S&P 500 (SPY) ETF chart as an example.
An uptrend features higher swing highs and lows, so a horizontal line can show when price hits a new high, signaling the trend's strength. In the SPY example, price moving above the line indicates an uptrend. If it drops below, it might mean the uptrend is failing with lower prices ahead.
Think of it as a line in the sand: above is bullish territory.
The Difference Between a Horizontal Line and a Trendline
Both might mean lines on a chart, but a horizontal is strictly level, while a trendline angles along rising lows in uptrends or falling highs in downtrends.
Limitations of Using a Horizontal Line in Technical Analysis
A horizontal line isn't a real price barrier; it's just a tool to help you decide if you should go bearish or bullish.
Where you draw it is subjective—not everyone picks the same level.
At critical prices, price might whipsaw around the line, causing confusion or losses until it decisively breaks one way or the other.
Other articles for you
Investment Advisory Representatives (IARs) are licensed professionals who provide personalized investment advice and financial planning through registered investment advisory firms.
Modified duration measures how much a bond's price changes with a 1% shift in interest rates, building on Macaulay duration to help investors assess risk.
Backup withholding is a tax mechanism where payers withhold taxes on investment income to ensure government agencies collect owed taxes from investors.
An unbundled life insurance policy, also known as universal life insurance, offers death benefit protection with a flexible savings and investment component that policyholders can access during their lifetime.
Operating cash flow measures the cash generated from a company's core operations, indicating its financial health and sustainability.
A discount broker executes buy and sell orders at low costs without providing investment advice, contrasting with full-service brokers.
Positive economics is an objective approach to economics that relies on facts and data for analysis and predictions, contrasting with normative economics which incorporates value judgments.
Portfolio investment involves owning and managing various financial assets to achieve returns and growth while balancing risk.
The Hodrick-Prescott filter is a macroeconomic tool that smooths data by removing short-term business cycle fluctuations to reveal long-term trends.
This text explains what stock price targets are, how analysts calculate them, and their role in investment decisions.