Saturday, March 31, 2012

The Art of Speculation Series 5 - Understanding Support and Resistance and Who sets it


When you look at a chart, you will notice there are days where the market is heading upward and days the market heading downward. These gyrations in prices are called the ‘tides of speculation’. These tides of speculation are the result of the battle between the bulls and the bears. When bear wins there will be a downtrend and when the bull wins there will be an up trend.



Support and Resistance Level

Support is a price area where the demand of the stock exceeds supply and hence will prevent a further drop in the price. Whenever the price of the stock touch the support level, buyers will appear to support the price level. It can be shown by the purple line on the above chart.

Resistance is a price area where the supply of the stock exceeds the demand and will prevent further advances in the stock price. Again when the stock price approach the resistance level, sellers will appear in numbers to offer their stocks. Thus will prevent any further rise in the stock. It can be shown by the red line on the above chart.

However, a lot of traders do not know the difference between a major and minor support and resistance. A major support refers to a situation where a stock is declining to retest the prior low. A minor support refers to a situation where a stock is declining to retest a prior high. Hence, the opposite will be true for the major and minor resistance.

As can be seen from the above chart, once the major resistance is broken it will become the minor support. This is because the stock will be retesting the recent high that is broken.





Trade using Support and Resistance


How do we trade using Support and Resistance? As shown by the above chart, any Breakdown from the support level ($60 in above) represents a shorting opportunity or a selling opportunity. This is where sellers overwhelm buyers.

Any Breakout from the resistance level ($47 in above) represents a buying opportunity. This is where buyers overwhelm sellers.

It is also important to understand that the price ranges between the support and resistance is not registered there for nothing. In fact there are SET by the Insiders and Big Money.
They are the people who have enough funds to set the support and resistance prices.

They are the people who have enough purchasing power to buy hundreds of thousands if not millions of shares in order to influence the support and resistance prices. The main reason for them to set the support and resistance prices, is that it will enables them to ‘Accumulate enough Shares’ before their next BIG Move. Sorry to say, it is not me or you or the rest of the folks out there that can influence those prices.

This is good news because when we know it is the insiders and big money that set those prices then we can more or less track their money trail. Knowing about insider buying and selling can boost your returns in the following ways.



  1. Help you align with the savviest investors around


  1. Help you discover hidden gems early


Any breakout from the resistance level represents a buying opportunity because this is where buyers overwhelm sellers. That means someone knows something that we don’t.

This is important because once a stock break through either the support or resistance level with good volume, then there is a strong tendency for it to continue in that direction for an extended period of time.

In conclusion, by understanding support and resistance, it will enable you to ‘Buy What the Big Money and Insider Buys’



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