Timely Entry and Exit with Support and Resistance Levels - Part 2

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.

 

1. Horizontal Levels – Previous Key Price Levels

 

 

•       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).

 

2. Establishing With Trendline

 

Trendline serving as resistance and support. We can see that everytime the share price of Oando Plc reaches the support trendline (upward sloping) price tends to pick up an upward rally and selling presure is seen when it reaches the resistance trendline

 3. Establishing with Fibonacci

 

Validating Support and Resistance Levels

1. Trends challenged – Support and resistance often act as decisive trend changers. When an existing trendline meets resistance, be prepared for a dynamic shift

2. Places change – If support is violated, that same level will act as future resistance

3. Retests reinforce – The more often a trendline is tested, the more valid it becomes.

4. Volume reinforces – If a resistance or support level is associated with increasing volume, the trend becomes more valid.

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.

In the next article, I would be looking at how to combine/blend support and resistance with technical patterns and tools.

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