Two most basic yet effective technical patterns are the support
and resistance. Whether you are a short term (speculator/growth) or long term
(value) investor in the equity, bonds or derivative markets an understanding
and effective application of the concept of support and resistance would create
the needed edge you desire for maximum returns investing in the market.
Support and resistance represents key junction of demand and
supply. The financial market is driven by excessive demand (up) and supply
(down). Price advances when demand is greater than supply on the other hand
price decline when supply is greater than demand. In the case where demand and
supply are equal price tends to stay in a range.
What is Support?
Support is the price level at which demand is believed to be
strong enough to prevent further decline in price. Support is a level at which
market value of any asset class is seen to be cheap and sellers are unwilling
to sell while buyers become more inclined to buy. By the time price gets to
support level demand is seen to overpower the supply and price began a rally.
(Support levels are
arrow pointing upward – higher buying pressure)
Does this happen all
the time?
No, sometime supports does not always hold as price breaks
below the support level, this means sellers have overpowered the buyers. In this
case, there is more willingness to sell or lack of willingness to buy. Here the
broken support becomes a new resistance level (where supply is greater than
demand).
What is Resistance?
Resistance is the price level at which supply is believed to
be strong enough to prevent further rise in price. Resistance is a level at
which market value of any asset class is seen to be expensive and buyers are
unwilling to buy while sellers become more inclined to sell/distribute. By the
time price gets to resistance level supply is seen to overpower the demand and
price began a fall.
(Resistance levels are
arrow pointing downward – higher selling pressure)
Does Resistance hold
all the time?
As with support, Resistance levels can be breached at this
point the buyers has overpower the sellers thereby pushing prices up. We see
renewed willingness to buy with few selling pressure. Here the broken
resistance becomes a new support level.
How to establish a
Resistance and Support
Consider resistance and support as mirror image that guides
the action of market participants in timing the market.
Support can be established with the previous reaction lows. Resistance
can be established by using the previous reaction highs.
Consider the weekly chart above of Access Bank Plc, a
company traded on the Nigerian Stock Exchange (NSE). The upward point white
arrows show support point where renewed buying interest overpowers the selling
pressure. You would notice that price did not break below the previous price
lows preceding the arrow. On the other hand, Resistance levels where selling
pressure overpowers the buying pressure is seen in the downward pointing arrow.
At this point, there is more interest to sell than buy.
In a few occasion we see price break previous resistance and
support (N7.09K key level).
Another example is Guaranty Trust Bank (GTB) Plc share price
where I used trendlines to determine entry and exit for the long term. See chart
below
Support and resistance is a powerful technical pattern that
can help traders (short or long term) become timely in entry and exit.
Support and Resistance can be more powerful when combined
with other technical patterns and volume analysis so as to avoid false signals.
I would be teaching
on how to effectively use support and resistance at the 2 Day technical analysis
workshop to hold on Saturday 15th and 22nd July 2017, to
register or more details visit www.tiameetup.com/
or call 09092133294.
In the next article, I would be looking at how to identify
high probability setups using support and resistance with technical patterns
and tools.
Join me at the 2 Day Technical analysis workshop and create
the edge you need in the market place.
Happy trading day
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