Support and Resistance
With support and resistance we will be looking at what for many is the purest form of market analysis, raw price data (price action).
This is where traders will focus in on their chosen time frames at what the market is doing in the here and now; this can be helped by plotting the levels of previous support and resistance. You see price will very really go up or down in a straight line. Rather it will move up in a series of higher highs and higher lows as demonstrated in the chart below.
The same can be said for a falling market. It will move down in a series of lower lows and lower highs.
These are clear marked areas of price movement where the market has found support or has found resistance.
Support being the point at which the market is considered under-priced and therefore rallies, moving higher. The market is showing that traders who have a more bullish, positive view have gained the upper hand and so the market moves higher as they start to buy.
Resistance being the point at which the market is considered overpriced and therefore drops, moving lower. The market is showing that traders who have a more bearish, negative view have gained the upper hand and so the market moves lower as they start to sell.
As you can see in the chart below the zigzag pattern is making its way down, a bear market.
One point to remember is that support and resistance levels are not exact numbers. At times you will find the market "testing" the levels of support and resistance breaking those levels for a short time but then closing inside them.
As you can see the in the chart above there are clear marked areas where the market has drawn a line in the sand rather than the exact number every time. One way, in which the more basic line chart can help you, because the line chart only shows the closing price you don't have the extremes of say the candlestick charts which can get a little confusing at times.
It's a good idea to place your lines of support and lines of resistance at the very start of each week; we like to do ours on a Sunday afternoon (GMT) before you get any new movement from the coming week. Remember to place your line around areas where you can see the market (price) has formed several peaks or troughs. The more often the market (price) tests a level the stronger that level becomes and we would recommend that you keep those lines on your charts only for as long as they are relevant.
Return from Support and Resistance to Technical Analysis.