Chapter 5 – Support and Resistance

Chapter 5: Support and Resistance

Chapter outline for this lesson:

 Support & Resistance

 Bouncy ball in a box
 How to identify support and resistance
 False breakouts and ideal breakouts
 Support turning to resistance, resistance turning to support
 Making a statement
 Why you need to know SNR
 Sum up of this lesson

Support & Resistance

Support and resistance are levels where the stock had difficulty
trying to break through and continue their current trend, due to the
sentiment of the buyers and sellers in the market.

Bouncy ball in a box

Imagine you drop a small bouncy ball into a box. The ball is going to keep
bouncing inside the box. Imagine this ball to be the stock that you are
looking at. When the ball bounces and moves up, it will hit the top of the
box and fall down. Now in the stock market we call this resistance.

When the ball bounces and moves down, it will hit the bottom of the box
and fly up. In the market we call this support.
Now this will keep happening until the ball has enough force (sentiment) to
break through either the resistance or support. This force will come from
the buyers and sellers in the market.

When there are more bulls than bears, the stock will break resistance and move higher.
When there are more bears than bulls, the stock will break support and move lower.

How to identify support and resistance?

Support and resistance depends on the current direction of your stock.

When the stock is moving up, it will face resistance.
When the stock is moving down, it will find support.

For Support
This refers to levels where the stock repeatedly found support and could not move
lower.
Every high and low is a possible support level. When you look at the chart, you may see
that there are many possible support levels. But we will not know if the stock will find
support at these levels. We can only observe the stock and watch how it reacts.
To draw a Support Level:

 Identify peaks and

troughs that are close to
the current stock price

 Draw horizontal lines at

these peaks and troughs

 Try to look for support

levels that touch a few
highs and lows

 Large volume tend to

act as strong support
levels

Screenshot from Yahoo Finance

For Resistance
This refers to levels where the stock repeatedly found resistance and could not move
higher.
Every high and low is a possible resistance level. When you look at the chart, you may
see that there are many possible resistance levels. But we will not know if the stock will
find resistance at these levels. We can only observe the stock and watch how it reacts.
To draw a Resistance Level:

 Identify peaks and

troughs that are close to
the current stock price

 Draw horizontal lines

at these peaks and
troughs

 Try to look for

resistance levels that
touch a few highs and
lows

 Large volume tend to

act as resistance levels

Screenshot from Yahoo Finance

Note on spotting Significant Levels

Support and resistance levels that have been repeatedly tested are significant levels.
When a significant support and resistance level is broken, investors should pay
attention as it could be signaling that the bears or bulls have managed to take control
and a new trend might be happening.

Support turning to resistance (vice versa)

When drawing your support and resistance levels, you might notice that some of these
levels coincide. This is another feature of support and resistance levels:
When a support level has
been broken, it will turn
into a resistance level in
the future.

When a resistance level

has been broken, it will
turn into a support level in
the future.

Screenshot from Yahoo Finance

False breakouts and Ideal Breakout

A false breakout is when the stock passes a support or resistance level but it turns and
retraces back.

For support, it is when a stock closes below the support level before suddenly turning
above it.

For resistance, it is when a stock breaks through the resistance level before suddenly
turning down underneath it again.
 Screenshot from Yahoo Finance

Example of a False Breakout for Johnson & Johnson

Ways to avoid false breakout

 Wait a few days to ensure that the breakout is confirmed and valid.
 Use a range to act as support or resistance rather than a specific level.

The ideal breakout would consist of a strong move with high volume and it would break
through and close past the support or resistance level. However not all breakouts will
exhibit these requirements.

Making a statement

I would like to say that drawing support and resistance levels is considered more of “an
Art and not a Science.” This means the support and resistance levels for the stock is
depended on the chart presented to you and can differ from chart to chart.
Why you need to know SNR

Being able to spot support and resistance levels will provide you with more knowledge
on when to buy and sell so you can maximize profits and minimize losses. For example,
you might try to time your entry in the market to coincidence with the support and
resistance levels that you've drawn.

1 more example

Support and resistance levels are present in almost every chart and here is another
example on drawing them.

Most websites don't allow you to draw support and resistance; you will need charting
software if you wish to draw them on the charts.
Summary of Lesson 5

 Support and resistance levels show the sentiment of the bulls and bears in the
market
 A support is a level where the stock is repeatedly turned up
 A resistance is a level where the stock is repeatedly turned down
 Significant support & resistance are levels that have been repeatedly tested
 False breakouts can occur with support and resistance. Ideal breakouts don't
always happen (Watch for price action and volume)
 Support can turn to resistance and resistance can turn to support
 Support and resistance is more of an art and not a science