Definition, Uses, Example in Technical Analysis
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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.
Key Takeaways
- A horizontal line is commonly used in technical analysis to mark areas of support or resistance.
- A horizontal line runs parallel to the x-axis.
- In technical analysis, the horizontal line is typically drawn along a swing high, or a series of them, where each high in the series stopped at a similar level. The same concept applies to swing lows.
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).
Image by Sabrina Jiang © Investopedia 2021
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.
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