Support and Resistance Review

Support and Resistance represent key turning or pivot points in the price action of an index, ETF or stock. Let's review the principles of support and resistance. Support is every low point on a chart. Buyers cause support. It is the point where buyers have more strength than sellers and prices go up as a result. Resistance is every high point on a chart. Sellers cause resistance. It is the point where sellers have more strength than buyers and prices go down as a result. When price drops to a support area two primary things can happen; price can bounce up or price can break through support. Price can pivot up or down...like a door hinge that swings both ways. A minor third possibility can occur and that is price can go sideways. In active markets this can occur for relatively short periods of time but will not usually continue for long. When price breaks support it is likely to fall to the next support level, at least that is the theory. A look at actively traded charts seem to support this concept most of the time. If a trader is long a market and price begins to break a support area, a trader should ask themselves if they are comfortable with the drawdown they would incur if price falls to the next support level. If they are not comfortable taking on that drawdown, the most logical course of action is to sell or take some other hedging action. The same theory applies to resistance. When price breaks through resistance it is likely to rise to the next resistance area. Again a look at actively traded charts seem to support this concept most of the time. If a trader is short a market and price begins to break through a resistance area, a trader should ask themselves if they are comfortable with the drawdown they would incur if price rises to the next resistance level. Again, if they are not comfortable with that drawdown, the logical course of action is to close the position or take some type of hedging action. As you watch the charts keep in mind these important aspects of support and resistance and trade accordingly. Don't take on more risk than your portfolio and good money management rules will allow. There will always be another opportunity or another good time for the opportunity now being watched.