StockTrader.com

Investing Online Made Easy

  • Getting Started
  • Market Recaps
  • Education
  • Online Brokers
  • Trade Journal

Posted by Sean Hannon | Last modified on Apr 11th, 2018 | Published May 11th, 2009

5 Critical Rules for Understanding Support and Resistance

Two of the most basic, yet effective, technical patterns are support and resistance. These events are horizontal trendlines which cause a stock’s direction to reverse. 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.

Correctly identifying these trend changers will allow you to establish initial price targets and to develop your own sell discipline. As with other patterns we have previously discussed, knowing the fine details of support and resistance levels will increase your chances for success. These five support and resistance rules are:

1. Trends challenged – Support and resistance often act as decisive trend changers. When an existing trendline meets resistance, be prepared for a dynamic shift. For example, in the Allstate (ALL) chart, when the blue uptrend converged with resistance, prices moved lower.

all-for-resistance-artilceClick to Enlarge

2. Places change – If support is violated, that same level will act as future resistance. As the Dryships (DRYS) chart illustrates, the same horizontal trendline continues after support is violated, but with differing effect.

dryships-changing-from-support-to-resistanceClick to Enlarge

3. Retests reinforce – 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 a four-month period, we should expect any future rallies to stall at this price.

clf-for-resistanceClick to Enlarge

4. Volume reinforces – If a resistance or support level is associated with increasing volume, the trend becomes more valid. Consider the trading history of Agrium (AGU). Since September 2008, $42.50 has served as resistance. Each time that price level is tested, volume increases (blue circles). This pattern adds weight to the $42.50 level and indicates that overcoming that price point will take significant time.

agu-resistance-with-volumeClick to Enlarge

5. Time matters – The more recently a level has been established the more useful it is. A problem with the current bear market is that quick losses had many traders looking well into the past for support levels. Unfortunately, grasping distant history is not useful. Examining a three-year graph of Google (GOOG), we see a valid support at $520. By the time stocks were collapsing in the fall of 2008, that support level had not been tested in over one year. This made the support less important. When GOOG quickly traded through $520 and kept collapsing, we should not have been surprised.

Click to Enlarge

Support and resistance levels are key mile markers in a stock’s progress. Whenever you’re developing trading strategies, consider these points on the graph. Doing so will help set profit targets and prevent frustration when eventual reversals occur.

Sean Hannon, CFA, CFP is a professional fund manager.

Further Education, Technical Analysis:

  • 5 Key Guidelines for Trading Stock Chart Channels
  • Breaking Down Stock Chart Types
  • How to Read Stock Charts
  • 5 Main Assumptions Behind Using Technical Analysis
  • Top 5 best Free Stock Chart Websites
  • 5 Rules for Predicting Stock Market Trends
  • Stock Chart Education Test (Answers)

Join Over 24,000 Investors

Receive Weekly Market Recaps directly in your email inbox!

Log, Store, and Analyze Your Trades

Whether you're a new or seasoned investor, the StockTrader.com Trade Journal helps you trade better:
  • Step 1 - Add trades
  • Step 2 - Mark strategies and mistakes
  • Step 3 - Analyze your results
  • Step 4 - Improve your trading
Get Started Now

Stock Market Recaps

Join over 24,000 investors and sign up today for our free weekly newsletter.

Most Popular

  • 20 Must Read Investing Books
  • 10 Trading Secrets I Wish I Knew When I Got Started
  • How to Retire With At Least $1 Million Dollars
  • 10 Great Ways to Learn Stock Trading
  • Favorite Trading Tools, Services
  • 5 Best Free Stock Chart Websites
  • Compare Stock Brokers
  • 60 Stock Tips for Investment Success
  • 5 Best Free Stock Scanners
  • List of Inverse ETFs
  • List of 2x 3x Long ETFs
  • Learn Technical Analysis
  • Stock Chart Basics
  • Top 10 Finance iPhone Apps
  • Stock Risk Calculator
  • Product Reviews

Latest Market Recaps

  • 2019 Online Broker Rankings Published at StockBrokers.com and ForexBrokers.com
  • Weekly Market Recap Feb 17, 2019
  • Weekly Market Recap Feb 10, 2019
Compare Brokers at StockBrokers.com
  • linkedin
  • twitter
  • facebook
  • rss
  • About
  • Contact
  • Terms of Use
  • Disclosures
  • Privacy Policy

StockTrader.com (Reink Media Group) is not an investment advisory service, or a registered investment advisor or broker-dealer and does not purport to tell or suggest which securities customers should buy or sell for themselves.  The analysts and employees or affiliates of StockTrader.com may hold positions in the stocks or industries discussed within the Website.  You understand and acknowledge that there is a very high degree of risk involved in trading securities.  StockTrader.com has advertising relationships with some of the offers listed on this website. While StockTrader.com makes a reasonable effort to keep any listed information updated, it does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. Past performance is not indicative of future returns.

Back to Top

©2019 Reink Media Group LLC · All Rights Reserved