Support and resistance is one of the most widely used techniques in technical analysis – as it should be…
It’s a simple technique with big value…
You can see in the stock chart below that the SPY created a channel over the course of the last month, between support around 282 and resistance just under 295.
Just a few days ago the SPY broke above the resistance level. Many times a stock breaking a major resistance level will move up to test a previous high (orange line in the chart).
Will the SPY be able to continue its bull run?
We can’t say for sure, but I will be watching to see if the old resistance level acts as support now… which would bolster the case for a new high, down the road.
With a little bit of practice and guidance, you can be using support and resistance levels to improve your trading in no time.
I am going to share how I personally use them in my own trading and how invaluable this simple little concept can be…
What Is Support and Resistance Lines?
Support and resistance are crucial because they give us an idea of supply and demand — where traders may look to buy or sell.
Any price point that stops the price from falling below it, either for a temporary while or in a permanent reversal, is known as support. It is an area where demand is higher than supply, and it, therefore, supports the stock price at that level.
Resistance, on the other hand, is an area where supply is higher than demand. It, therefore, creates a ceiling for the stock price, making it pause or change directions.
Stock prices tend to pause — and many times reverse — at these levels due to the supply and demand imbalances.
Often times when a stock price breaks one of these levels, it then becomes the opposite.
What I mean by that is when a price breaks through a resistance level, it tends to become a support level.
With the buyers winning out, there is a tendency for them to create higher demand in that area to keep the stock above where they bought it.
Okay, that’s the basic theory… Click here to learn more.
… but how do you spot key support and resistance levels?
How to Find Support and Resistance
When you look at a chart, you will notice places where a price goes to and then gets stuck many times.
In other words, every time it gets there, it can’t quite make a move past that price level.
These are the areas of support and resistance.
Support is a price range where the stock has had a tough time breaking below and resistance an area the stock can’t get above.
To identify support, it will help to look for the bearish reversal points and draw a straight line that connects at least three of these points.
In the case of resistance, you can identify it by drawing a straight line and connecting at least three resistance points. The zones formed by these lines indicate the support and resistance areas.
Support and Resistance Indicator
Conventional methods of detecting support and resistance zones don’t always work as you are going to get dynamic supply and demand variations at different timeframes and instances.
So, to identify the zones with accuracy, you will have to refer to moving average, pivot points, and Fibonacci tools.
As these indicators help you to pinpoint the zones at specific times and instances, they are known as support and resistance indicators.
I labeled a support and resistance area on the chart of Encana Corp (ECA) below.
Notice how the stock price keeps bouncing up on the support line and down on the resistance line.
To spot support and resistance level stocks you just look at the charts and find areas that price stalls or bounces off multiple times.
How Do I Use Stock Support and Resistance?
There are a number of ways to use these stock support and resistance levels in stock trading. One of my favorite uses is as a break out point.
What I mean by that is when a stock breaks a major support or resistance level, it tends to break out and build momentum… and continue in that direction.
So I am looking to buy the stock once it breaks above resistance or sell it if it goes below support…
Take a look at the chart for ECA again.
I was watching this stock as it formed the range between the support and resistance lines I drew.
I wanted to see the stock price stall out from the downtrend and create a support level and base as it did…
Next, I wanted to see the moving averages begin to turn up and cross to the upside. After that, I used the break above resistance to confirm a buy signal in the stock.
In the chart below, you can see all of these factors lined up and lead into the break above resistance.
The great thing is that I can repeat this process over and over again. And I share these trades with my members in real-time.
If you want to get access to trades like this on a daily basis, then don’t waste any more valuable time and join below.
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