Support & Resistance

Understanding support and resistance is essential to being a successful trader. There are thousands of different trading strategies, but every single one of them is based around some type of support & resistance system.

Support = Barrier to the downside

Resistance = Barrier to the upside

The simplest from of support & resistance is horizontal lines drawn at price levels as shown in the diagram below.

A breakout, as shown above is when price breaks above resistance or below support, respectively.

Once a stock breaks out to the upside, the prior resistance level now becomes support.

Previous resistance = current support

Support & resistance can be in the form of:

  • Moving averages
  • Previous highs and lows
  • Trend lines
  • Natural prices such as $10, $25, $50, $100

Study some of the support and resistance mockups created below:

The chart above is how price acts with horizontal support and resistance levels. The strongest support and resistance areas are areas that have been rejected from multiple times. Notice, once price breaks over resistance it finds new resistance and the previous resistance level now becomes support.

Support and resistance levels above are identified in an upward channel or two parallel trend lines. Trend lines are drawn to identify a trend. Price action above is creating high highs and higher lows creating and uptrend. The upper and lower boundaries act as resistance and support, respectively.

The chart above shows two trend lines in opposite directuons, but the price still rejects support and resistance trend lines before breaking out to the upside.

The chart above shows a moving average line displayed over the candlesticks. Moving averages can act as support and resistance levels as well. Some traders will use a moving average to determine the trend. For example, if price is above the moving average, the stock is in an uptrend and you can expect price to increase in the future. The opposite is true if price is unerneath the moving average. A popular moving average is the 20-day moving average which takes the price of the last 20 days and creates a smooth line.

The above chart now uses a moving average and horizontal levels as support and resistance. Look closely at where price stops or rejects and what happens once prices breaks over a key support or resistance level.

Keep in mind the above examples are mockups, therefore, they are very clean for educational purposes. It is important to remember that there is no perfect support and resistance LINE. Support and resistance should be used as AREAs. For instance, if you identify a support level at $20, the support may actually come into play at +/- $0.50 or 19.50 or 20.50. Real-live stock charts will not necessarily be as clean as the examples above.

In the examples below, notice how quickly price moves once it breaks out above or below resistance and support levels. A popular trading strategy is to break these breakouts and breakdowns.

Let’s take a look..

In WMT above, we see horizontal support (green) and resistance (red) levels.

Notice, how well OSUR respects the 20-SMA. Each time breaks above it rips 50-100% and each time it breaks below, it falls 50%.

Notice how price rejects the 200-SMA area on two occasions. Once price broke out over the 200-SMA, price jumped 60% in ~2 weeks.

You see the same pattern in DFS above.

In CVNA above, we have a solid uptrending channel. Price then breaks above the upper trendline with conviction and a new support trend line forms before eventually breaking down.