Speed resistance lines (SRLs) are also known as support and resistance lines. The lines can help a chartist determine where prices may go. The lines can show areas where prices could stop going up or down.
The story goes back to Charles Dow who said corrections usually correct 1/3 to 2/3 of their previous move. Corrections usually stop between 1/3 and ½ of the previous move. If a price goes more than 2/3 of the previous move, the trend is probably over.
Edson Gould apparently agreed with Dow and added a visual to the story.
The SRLs can be useful in judging when to buy or sell a stock. The lines can help estimate trade gains or losses and could help improve buying points, which in turn, can eliminate losses that may have occurred.
The lines can be used for both indices to see the trend and your favorite stocks and their possible moves.
Gould thought investors could make more money in longer-term holds than in shorter trade
Downtrend Line Calculations
First Line: Connecting High to Low • Middle Line: High to 2/3 point
Upper Line: High to ½ point • 2/3 point: High – (High – Low) x .667
1/3 point: High – (High – Low) x .333
The charts and explanation to the right are courtesy of StockCharts.com. They were in their ChartSchool. We recommend StockCharts.com as a website for your charting needs.
If you are a member of StockCharts.com, You can press the annotate button and the SRLs will drawn for you.