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How to Read Stock Charts: Part 3

Using support and resistance during technical analysis is like bringing a gun to a knife fight.

Lucifer Morningstar

Support and Resistance

If you've ever played tug of war with your dog, you know how exhausting it can be. It’s a constant back and forth, push and pull battle between you and a hairy beast. In the stock market you're pretty much doing just that! Yanking and getting yanked back and forth with basement-dwelling furry monsters. You should be pulling on the side of the institutions and handsome CEO's, not against them!

Me being pulled on by a market mover.

When prices stall at a price point, it can be a clear indicator of where the price of a stock can gravitate towards, either for strength or weakness. Support and resistance is a form of technical analysis that's used to predict price movements and mark potential buy and sell points. They represent certain predetermined levels of the price of a security at which it's thought that the price will tend to stop and reverse. These points are indicated by multiple touches of price without a breakthrough of the level.

A simplified chart would have less volatile price jumps with fewer spikes, but that isn't always realistic.

In the figure above, the price is like a kangaroo. It bounces within the support and resistance levels. It broke out of resistance levels three times, so after such buying followed by massive profit-taking, the stock broke support and tanked. At around $27.50 there was resistance, and that’s where the stock broke out multiple times.

Here’s another example:

  1. A first glance into the resistance, ENER saw around $35 a share, shown by the blue numbers on the (1) line .You’ll notice it took two knocks on the door for the price to gap up higher.
  2. Another example of technical resistance is shown by the blue numbers on the (2) under the blue line at $73 a share. It looks like two mountains under the blue line, with the path looking like it bounced off the line, known as resistance.
  3. ENER is creating support as $60 is being formed as the new base. Right on the (3) line. The price doesn't go any lower than $60. This would verify a support trendline because it's being supported by the $60 price point.
  4. Highlighted in purple shows us the next area the stock will most likely find resistance. Climbing above $83 a share would create a new ceiling for the stock.

When prices are falling, support represents the moment when buying overwhelms selling and prices reverse. Conversely, when stocks are moving higher, resistance is the point where selling overwhelms buying and the price increases stop. It's like you're jumping through the ceiling of your house, creating a big hole onto your second floor and then landing on that second floor. You are being supported by that floor, which was once a ceiling.

It’s like (my girlfriend might slap me for this) hitting on a girl at the bar. So you finally GAP UP the stones to talk to her. From your seat to hers is like your personal price movement shooting up. Making eye contact and gaining interest is your first resistance spot. After her giving you the googly eyes, that is now your support. You’re in! Now the next step would be, of course, to show her how funny you are. That’s the next resistance point because the funnier you are the more support you’ll achieve, also known as getting on her good side. She finally lets out a guffaw after hearing your hilarious, side-splitting joke about listening to stock advice from a stranger on the internet who pretends to be a television character. Boom, you just blew past the second resistance point, reaching new highs. As stocks reach higher highs, higher lows become support for them to consolidate and reach higher prices. You’ve been gaining support as your new lady friend becomes more comfortable with you, giving you more room to not eff it up so badly. Being the audacious and gutsy guy you are, you ask for that phone number - the biggest resistance point. You’ll be faced with many different situations in the market, such as a fakeout. A fakeout is exactly what it sounds like: you see the chart building up for a beautiful new high and it winds up being a fake bullish pattern that tanks the stock price from new support. This is like when she gives you an eleven digit phone number. If she does, don’t worry about it! There are plenty of other opportunities. Alternatively, there is no fakeout and the price moves higher. In this case, you get the full, correct ten digits and feel like a million bucks. Congratulations, you have a date!

Correctly identifying these trend changes will allow you to establish initial price targets and to develop your own sell points. Knowing the fine details between support and resistance will increase your odds of success.

Support and resistance often act as decisive trend changers. When an existing trendline meets resistance, be prepared for a shift in change. To give you an example, in the Allstate (ALL) chart, when the blue uptrend converges with resistance, prices move lower. Rejected like a freshman asking out a senior girl.

If support is violated, that same level will act as future resistance. The stock goes for a high five on that line but ends up falling downwards as nobody wants to give it a high five at that price. As the Dryships (DRYS) chart shows below, the same horizontal trendline continues after support is violated. Now it chills under the blue line, which has turned orange into a resistance line. So when you asked for that phone number, she told you her pet hamster stole her phone and suggested you send her a postcard to her farmhouse in Wyoming. Ouch.

The more often a trendline is tested, the more valid it becomes. Cliff Natural Resources (CLF) shows persistent resistance at $32.50. With four separate challenges of this level over four months, we should expect any future rallies to stall at this price. From October to March, the price is trying to break through the blue horizontal line, before finally giving in to lower prices and not even attempting it again. So don't go asking for that number four times in a row, creep.

If a resistance or support level is associated with increasing volume, the trend becomes more valid. Look at the history of Agrium (AGU). In September 2008, $42.50 served as resistance. Each time that price level was tested, volume increased (blue circles). This pattern added weight to the $42.50 level and indicated that overcoming that price point would take significant time.

Support and resistance levels are key mile markers in a stock’s progress. When you crush three beers in 15 minutes, you know your stomach will support that. Go for the fourth and you might puke worse than Nikola (NKLA) did once Trevor Milton resigned. If you don't know, this dirt bag pumped up an electric vehicle merger and then dipped once he cashed out on millions of dollars. I'm just mad I didn't think of that first. Whenever you’re developing trading/dating strategies, consider these points on the graph. Doing so will help set profit targets and prevent frustration when eventual reversals occur. You don't want to be frustrated, do you? Being an emotional little twat is how you end up with your right hand firmly grasped to a forbidden sock puppet on a Friday night.