A key component of evaluating charts is to be able to identify where the areas of support and resistance are located. If we have already identified the trend on the chart, the next thing to do is to identify where the price may find these areas.
A simple way to look at it is that the support areas act like a floor and the areas of resistance act like the ceiling with price movement. Just like a ball would bounce up from the floor or down from the ceiling if we bounced it, stock prices will react in a similar fashion. Support is where the buyers are looking to re-enter the market and resistance is where sellers are looking to exit their positions. If we can identify these areas, we can better know where the best places are to be buying and selling. You can see an example of this in the chart below.
This week has been a bit of a choppy week in the market as traders have had a difficult time deciding which direction to move prices. Most of the price action was indecisive and just moved the market sideways. This type of market and stock movement can be hard for traders as setups can become difficult to find. Making sure we are patient in waiting for them is important so we don’t just jump into things that we shouldn’t.
We also had some important news releases as well as many different earnings reports from various companies. These earnings releases can be a primary reason why the market either moves or not so it’s good to be aware of the times during the year we see these come out. In addition to the earnings reports, this week we had the FOMC Statement and Fed Funds Rate come out. While there wasn’t any real change, many investors look to them for guidance in what direction things may be moving. The Advance GDP numbers also were released, and we saw a report of 6.5% which was quite a bit lower than the forecast of 8.5%. There were also several inflationary reports that came out this week which many investors are watching closely at this time.
Today we are going to look at the daily chart of the DJ-30:
This chart is a good example of where we might draw our support and resistance levels on a chart. The resistance area is identified by the horizontal line on the top part of the price. The area represents a barrier to price moving higher. At this level, sellers are coming into the market and looking to sell. While this chart is an overall indication of what the market is doing, the evaluation would be the same if this was a chart of an individual stock. The diagonal line on the bottom of the price movement represents the area of support. In this case, the support line is trending up as the price moves higher. Traders will use these areas to help them see places on the chart where they should be looking to buy and sell.
Take some time to review your process for identifying support and resistance as well as how you incorporate these areas into your buying and selling.
Bill Poulos is a financial educator, former General Motors executive and published author. When he retired in 2001, Poulos and his son Greg founded a financial publishing company, Profits Run, Inc . Profits Run shows beginners how to invest wisely with minimal risk. The company educates investors through various wealth management publications. Automatic Income Engine, Rapid Income Engine, and Premium Income Alert are some of the products implemented by Profits Run to help investors trade smarter with minimal risk. Poulos contributes to a variety of online news sources, providing information on the stock market. Bill married his high school sweetheart, Karen, in 1969. They live in Michigan, where Profits Run is located.