What Is a Horizontal Line?

In technical analysis, a horizontal line is often drawn on a price chart to highlight areas of support or resistance.

In geometric analysis, a horizontal line proceeds parallel to the x-axis. Put another way, on a perfectly horizontal line, all values on the line will have the same y-value.

Understanding a Horizontal Line

Horizontal lines are commonly used in technical analysis to highlight areas of support, where the price stopped falling and then bounced on prior occasions, or resistance, which is where the price stopped rising and then proceeded to fall on prior occasions.

The horizontal line is drawn by connecting similar swing lows in price to create a horizontal support line. For a horizontal resistance line, similar swing highs are connected.

The horizontal line is then used for analytical or trading purposes. For example, if the price of an asset is moving between support and resistance horizontal lines then the price is considered to be range-bound.

A move below the support horizontal line could indicate a further price decline, but if support holds and the price bounces higher then prices could be forthcoming. The same concepts apply to a resistance horizontal line. If the price moves above resistance, higher prices could be forthcoming. If the price reaches resistance and then starts to decline, the horizontal line has held and traders will watch for lower prices.

In more simple terms, a horizontal line on any chart is where the y-axis values are equal. If it has been drawn to show a series of highs in the data, a data point moving above the horizontal line would indicate a rise in the y-axis value over recent values in the data sample.

Fundamental Horizontal Analysis

Horizontal analysis is used to compare values or prices over time. This is an aspect of fundamental analysis in which an analyst will compare various earnings reports and statements over time. In this kind of analysis, time functions as the horizontal x-axis and allows analysts to calculate percentage changes over time, a useful tool for representing the degree of change.

Horizontal analysis looks at the trend of financial statements over multiple periods, using a specified base period, and typically shows the changes from the base period in dollars and percentages.

The percentage change is calculated by first dividing the dollar change between the comparison year and the base year by the item value in the base year, then multiplying the quotient by 100. For example, when you hear someone saying that revenues increased by 10% this past quarter, that person is using horizontal analysis.

Horizontal analysis can be used on any item in a company’s financials, from revenues to earnings per share (EPS), and is useful when comparing the performance of various companies.

A Horizontal Line as it Relates to Supply and Demand Curves

Supply and demand curves are drawn with price on the vertical axis of the graph and quantity demanded on the horizontal axis. When looking at supply and demand curves, a perfectly horizontal line indicates that an item has perfect elasticity, or that its demand is immediately responsive to changes in price. When the price of a perfectly elastic good or service increases above the market price, the quantity demanded falls to zero. With perfect elasticity, consumers simply are not willing to spend more than a specific price for a good or service.

Example of How to Use the Horizontal Line in Technical Analysis

Drawing a horizontal line is one of the simplest forms of technical analysis, but it also provides important information. On the chart below, a horizontal line is drawn on the SPDR S&P 500 (SPY) exchange traded fund (ETF).

An uptrend is when a price makes higher swing highs and higher swing lows. Therefore, a horizontal line can highlight when price is making a new high, in this case, thus showing signs of an uptrend. On the SPY chart above, the price is moving above the horizontal line indicating an uptrend. If the price falls back below the horizontal line, it could warn that uptrend has failed and lower prices may be forthcoming.

In this sense, the horizontal line acts like a line in the sand, where moving above the line is bullish.

The Difference Between a Horizontal Line and a Trendline

Both these terms could refer to the same thing: drawn lines on a chart. While a horizontal line is specifically horizontal, a trendline is typically angled and drawn along rising swing lows during a price uptrend or drawn along dropping swing highs during a downtrend.

Limitations of Using a Horizontal Line in Technical Analysis

A horizontal line is not an actual barrier for price. It is a technical tool which may help traders determine whether they should be more bearish or bullish.

Where a horizontal line is drawn is subjective. Not all traders may place the horizontal line at the same price.

At highly important prices, where a horizontal line may be drawn, it is possible the price will whipsaw around it. This could cause confusion or some potential losing trades until the price makes a more decisive move above or below the line.

What Is a Price Channel?

The term price channel refers to a signal that appears on a chart when a security’s price becomes bounded between two parallel lines. The price channel may be termed horizontal, ascending, or descending depending on the direction of the trend. Price channels are often used by traders who practice the art of technical analysis to gauge the momentum and direction of a security’s price action and to identify trading channels.

Understanding a Price Channel

A price channel forms when a security’s price is buffeted by the forces of supply and demand. This movement can be upward, downward, or sideways trending. These forces affect the price of a security and can cause it to create a prolonged price channel. The dominance of one force determines the price channel’s trending direction. Price channels can occur over various time frames.

Traders are always on the lookout for chart patterns that can aid them in their trading decisions. This is especially true for individuals who are disciples of technical analysis. Once a security’s price action carves out a set of highs and lows that follow a discernible pattern and can be connected by two parallel lines, a price channel has been formed. You can see this visualized in the chart below.

The lower trendline is drawn when the price pivots higher while the upper trendline is drawn when the price pivots lower. The steepness of inclines and declines determine the direction of the price channel’s trend. An upward or ascending price channel is bounded by trendlines with a positive slope. It indicates that the price is trending higher with each price change.

Likewise, a downward, or descending price channel has trendlines with a negative slope. This indicates that the price trends lower with each price change. The two lines of a price channel represent support and resistance. Support and resistance lines can provide signals for profitable investment trades.

Special Considerations

Price channels are quite useful in identifying breakouts, which is when a security’s price breaches either the upper or lower channel trendline. Traders can also trade within the channel. This means selling the security when the price approaches the channel’s upper trendline and buying when it tests the channel’s lower trendline.

Price Channel Analysis

There are a few ways to benefit from correctly identifying price channels. The best chance to maximize your gains happens when the security follows a delineated price channel path by using both long and short positions. Furthermore, consider the following:

• During an uptrend: A bullish investor may want to keep their holdings at the upward bound in anticipation of a breakout, which would lead to a surge in price. Investors may want to consider selling the asset or taking a short position when it hits the upper trendline as long as it looks like the security will remain within the price channel.
• During a downtrend: Investors may want to short the stock at the upper bound and take an even deeper short position they confirm a breakout. If an investor expects the price action to stay within the boundaries of the price channel, they could go against the trend and take a long position to maximize their profits.