If you’re new to technical trading, listen up: Support and resistance are the key building blocks to technical trading.
Among the most widely used concepts in technical analysis, support and resistance look simple enough but require hard work and practice to fully understand and use.
Support and resistance explained
Most experienced technical traders or chartists will tell you that there are certain price levels at which a stock will bounce, or reverse off of. In other words, the stock hits a “floor” — a support level — and then bounces back; conversely, if the stock hits a ceiling — a level where it is resistant to going any higher — it may reverse and start to sell off.
When a security or index breaks through those levels, it could pick up speed and keep rolling, or it could step back (thereby raising or lowering the ceiling or floor).
Here’s an example of a resistance level in the daily chart on the SPDR S&P 500 Index ETF (SPY).Source: TradingView
In this chart, the blue horizontal line, this is considered a resistance area or level. This acts as a ceiling; if the ETF fails to break above that line, it is likely to reverse and sell off.
Now let’s see what happened.Source: TradingView
SPY failed to break above resistance, and sold off thereafter. However, later on, the ETF eventually broke through and moved higher.Source: TradingView
Now an example of support, also using the SPY; in this case, the blue line represents the floor..
Here, you’ll notice the stock caught a bounce right off of its support area, and rose significantly thereafter.
Support and resistance levels are keys to technical trading; when you’re first starting out, focus on identifying and recognizing these areas, just as we did with the examples, because they will help you set targets, stops and to determine a trade’s potential risks and rewards.
Petra Hess runs PetraPicks.com. She is a technical swing trader and long-term investor in domestic and Canadian stocks and ETFs.