Speed resistance lines (SRL) are especially useful when looking at issues that are inside of strong trends. A chartist uses the SRL to determine support and resistance, and can be used by those interested in both short and intermediate phases as well as long-term outlooks. Simply put, the SRL measures the line of an uptrend or a downtrend.

Constructing SRL
Developed by the late Edson Gould, SRL is constructed by drawing a line from the most recent high of the uptrend down to the low of the same trend. Then you must divide the line into a third and then again into two-thirds. Having this done, the chartist will draw a line from the low point of the trend through these two points. The lines you have now created show the possible support on retracement. When studying a chart wherein a downtrend is occurring, one needs simply to reverse the process just discussed: every time an issue creates a new high or a new low, the speed resistance lines must be redrawn.

Interpreting SRL
In Stocks and Commodities Magazine, Jayanthi Gopalakrishnan writes, "If you are considering entering a long position in a security that is rebounding from a downtrend, identify the major high and low, insert the speed resistance lines and the study the price action at the two-thirds line."

Some traders use a 50% retracement as a rule of thumb, and many agree that a pullback from a major trend will always be within a range of 1/3 to 2/3 of the most recent upward movement; the 1/3 level is the minimum an investor can expect. At this level of 1/3, a giveback and increase in trading volume will occur because of the increasing number of individuals that understand retracements and wait for them as an entry into the issue. Investors have also learned that, should the retracement continue to fall through the 1/3 level and past the one-half (50%) mark, the next support will be found at the 2/3 level. And again, for those of you looking at an issue that is currently showing a downtrend, the reversal is true.

061803_chart1small.gif
Chart Created with Tradestation

In the first chart of SunMicrosystems Inc., the first line is drawn from about the $5 mark in early September 1998 to the high mark of the uptrend in late August 2000, which is at about the $69 level. The 1/3 SRL is then drawn off the major high and major low is the 2/3 line. As the tech stock bubble burst, SunMicrosystems started the free fall, and, as you can see, the stock price was buoyed for a period of time at about $42.

The price action then bounced back to a high of $53 on December 6 before continuing the slide downward. Seasoned technicians would have determined that, at this last high point on December 6, the trend reversed and not just as a correction in an uptrend. At the 50% retracement mark, no resistance was visible, and the same can be said for the 1/3 mark at the end of August 2001, when Sun was at $13. As the stock price fell with ease through the 1/3 mark, chartists would then have expected the stock price to drop to the levels at which the uptrend first started.

061803_chart2small.gif
Chart Created with Tradestation

In the second chart of Canadian tech-giant Nortel Networks, we see a downtrend that started in late summer 2000 and bottomed out in October 2002, at about the 50-cent level. The 2/3 speed resistance line is drawn and the price action cuts through the line at about $1.50 in mid-November. As this was the first level of resistance, technicians waited to see whether or not investors were ready to come back into the arena of a somewhat risky penny stock. Little resistance was met here and the stock price continued to the 50% speed line, and it appears as though investors are ready again to invest capital in Nortel.

Speed resistance lines allow investors the opportunity to time their entry into an issue that they can determine has turned the corner of a downtrend and established a bonafide uptrend. On the flip side, it indicates to an investor holding a long position that the uptrend of that stock has run its course and that it is now time to sell.

The Bottom Line
Since we started with a quote from Stocks and Commodities writer, Jayanthi Gopalakrishnan, let's conclude with a few more of his words:

"If you are considering entering a long position...insert the SRL and study the price action at the two-thirds line. If there is enough resistance to stop prices from breaking above this line, do not enter long positions. Only when prices close above this line for two consecutive days should you enter your long positions. If prices seem to decline from or close to this line, you might consider entering short positions."

Related Articles
  1. Chart Advisor

    Big Double Top Patterns On the Verge of Breaking

    These stocks have created big double top chart patterns, and are on the verge of breaking the patterns to the downside--a bearish signal.
  2. Chart Advisor

    Gold Struggles to Climb Higher and May Fall Soon

    Traders will be watching the price of gold over the coming weeks. We'll take a look at how a couple major moving averages are suggesting that the next move could be lower.
  3. Technical Indicators

    Use Market Volume Data to Determine a Bottom

    Market bottoms often carve out classic volume patterns that let observant traders make fast and accurate calls.
  4. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  5. Trading Strategies

    Who Actually Trades or Invests In Penny Stocks?

    Although penny stocks are highly speculative, millions of people trade them daily. Here are 10 different types who do.
  6. Chart Advisor

    4 Stocks Still Flashing Buy Signals

    In the midst of volatility and a big market sell-off last week, these stocks are flashing buy signals.
  7. Technical Indicators

    Understanding Trend Analysis

    Trend analysis is the use of past performance to predict future price movement of a security.
  8. Forex Education

    These Are The Best Hours To Trade the British Pound

    The best times to trade the British pound are centered around economic releases at 1:30 am, 2:00 am, 8:30 am and 10:00 am U.S. ET.
  9. Trading Strategies

    How To Buy Penny Stocks (While Avoiding Scammers)

    Penny stocks are risky business. If want to trade in them, here's how to preserve your trading capital and even score the occasional winner.
  10. Chart Advisor

    Stocks to Short...When the Dust Settles

    Four short trades to consider, but not quite yet. Let the dust settle and wait for a pullback to resistance for a higher probability trade.
RELATED TERMS
  1. Tactical Trading

    A style of investing for the relatively short term based on anticipated ...
  2. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  3. Indicator

    Indicators are statistics used to measure current conditions ...
  4. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
  5. Mass Index

    A form of technical analysis that looks at the range between ...
  6. Money Flow Index - MFI

    A momentum indicator that uses a stock’s price and volume to ...
RELATED FAQS
  1. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  2. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  3. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  4. How are double exponential moving averages applied in technical analysis?

    Double exponential moving averages (DEMAS) are commonly used in technical analysis like any other moving average indicator ... Read Full Answer >>
  5. How do you know where on the oscillator you should make a purchase or sale?

    Common oscillator readings to consider making a buy or sale are below 20 or above 80, respectively. More aggressive investors ... Read Full Answer >>
  6. What are the alert zones in a Fibonacci retracement?

    The most commonly used Fibonacci retracement alert levels are at 38.2% and 61.8%. A 50% retracement level is also commonly ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!