SUPPORT AND RESISTANCE
The name might already tell us all about what it is. Support is simply a ZONE ( not a line) where price, if falls into, will probably bounce back, goes up or put the bear on hold for a while.
The simplest form of Support is the historical Tops and Bottoms. By Top and Bottom, I don’t mean it must be an absolute high or low, it can be the top or bottom of a small correction.
Let’s look at the first example:
This is the HPQ weekly chart. The bottom after the market crash in 2002 provides a super strong support ( Support 1), which marks another bottom after a massive sell-off in 2012. 10 years later and that level still holds!! Who says chart doesn’t have memory?
As you probably noticed on the chart, these 2 lows in 2002 and 2012 are not exactly at the same level. This is why I always emphasize that Support is a ZONE not a LINE. Now you might start to wonder then how big is that zone? The answer is I don’t know, the size is subjective and varies between investors and investors. The best answer I can give you by now is to practice and over time you can ‘feel’ how big is enough for a Support/Resistance Zone.
Support 2 is the low of a correction in 2006, which then provides support for the bear market in 2008 and 2009. You might disagree with me about the Low in 2009 (the third circle from the left), which already breaks through the support very far. I’m not wrong and neither are you. From my own trading experience, I can feel that Support level and utilize it in the future. If you are not comfortable with it then don’t force yourself! Just ignore that level and trade like nothing is there
If you already grasp the Support concept then you should have no trouble with Resistance. Resistance is completely opposite with Support. It is the ZONE where price, if rally into, will probably fall or put the bull on hold for a while.
As is the case with Support, Resistance doesn’t need to be an absolute High or Low.
This is the enlarged weekly chart of HPQ.
Resistance 1 is a very critical level, the stock peaks right before the crisis in 2008. It then provide a resistance in 2010
Resistance 2 is also an example to show the point Resistance and support doesn’t have to be an absolute high or low.
3) SUPPORT AND RESISTANCE:
Some of you might already be confused when I say “Support is the historical Tops and Bottoms”. How can it be a Top?
Luckily I have the answer for this question. When a support is confirmed broken or the prices break through the support zone, Support turns into Resistance and vice versa. If a Resistance Zone is broken, it then becomes a support. So a Top today might be a Resistance but after the prices break through it, it becomes a Support. And if a bottom is broken, it then becomes a resistance in the future.
Let’s take a look of HPQ again:
This is the monthly chart of HPQ. Still Remember the Support 2 level? The orange cycle marks the break of this Support level. The price breaks through the support with a very bearish candle marked with the arrow. This Support now turns into Resistance. As you can see, the price immediately pulls back to test this level but doesn’t make it through. The price is quickly rejected by the new Resistance level and continue down to find Support level 1.
Put the market on hold:
As I mention above, the resistance and support does not always provide a reversal in trend. It might just not be strong enough to hold the prevailing trend. In this case, the price just stops there for a breadth and might continue to go in the same direction.
This is the daily chart of EUR/JPY (Euro and Japanese Yen). Clearly there is an important support on Oct 2014. The prevailing trend is very bearish but when the prices come to this support level it starts to struggle. The price stabilizes into a rectangle, and hasn’t been able to continue down or reverse back. This is a very common scenario in the real world trading. The strategy here is to patient and wait for a clear signal.
We have finished with the most basic concept of Technical Analysis. Let’s continue