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 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…
Support and resistance are crucial because they give us an idea of supply and demand — where traders may look to buy or sell.
Support is an area where demand is higher than supply. Therefore supporting the stock price at that level.
Resistance, on the other hand, is an area where supply is higher than demand. Therefore creating a ceiling for the stock price.
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?
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.
I labeled a support and resistance area on the chart of Encana Corp (ECA) below.
Notice how price keeps bouncing up on the support line and down on the resistance line.
To spot support and resistance you just look at the charts and find areas that price stalls or bounces off multiple times.
There are a number of ways to use these levels in 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 once it breaks above resistance or sell 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 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.