Finding
Support & Resistance
Support
and resistance levels can be identified by many means.
Japanese candlestick can aid in identifying support
and resistance levels as well as other techniques such
as Fractal formations, market tops and bottoms, and
trend channels. As we discuss the image above, well
touch on a few of the techniques and how to use them.
The
easiest way to understand support and resistance is
to think of a skyscraper. As one jumps into the elevator
and goes to different levels, each level has a unique
floor and ceiling. Support should be thought of as a
market floor. Resistance should be thought as a market
ceiling.
As
the market price moves below a support level (through
the floor), the support level then changes to a resistance
level (the new ceiling for the market price). Inversely,
as the market price moves above a resistance level (through
the ceiling), the resistance level then becomes a support
level (the new floor for the market price).
Within
most charts, investors will be able to identify many
different levels of support and resistance. Because
of this, investors should concentrate their efforts
on support and resistance levels that are most relevant
to the immediate market price activity. Sometimes these
immediate support and resistance levels can be carries
back to previous support and resistance levels that
have formed. The market is unique in this manner that
once a support or resistance level has formed, it will
usually maintain that level in the future as the market
price continues to fluctuate.
A.
The high at this level is obviously a resistance level
because the market was not able to continue to bullish
rally. This type of resistance is fairly easy to find
on a chart. Any major market reversal will typically
be a support or resistance level.
B.
The resistance level created by the Three River Evening
Star pattern formation is near the high of the white
star candle. This type of pattern formation is a potential
top formation which is why investors should pay close
attention to the resistance level that has formed here.
C.
This support level is created by an extended Tweezers
Bottoms pattern formation between the two candles with
equal lows. This type of candlestick formation clearly
identifies market support at the lows of the two candles.
When the market attempts to test a price level twice
(sometimes more) and cant break that price level, investors
should consider this a defined market support level.
D.
At this level another Tweezers pattern forms to identify
a new resistance level. Notice though that the previous
resistance levels at B had been broken with the market
rally. The tweezers tops pattern that formed at D is
again a clear indication the market has reached a new
ceiling.
E.
Only a few trading sessions after D, the market fell
back to a previous resistance level (B) that carried
forward to create a support level at E. This is an excellent
example of how a resistance level (a ceiling) will become
a support level (a floor) as the market moves above
the ceiling.
F.
The support level found here is an intermediate support
level because the market fell after a bullish rally,
then began to rally again. The interesting thing about
this support level is that one could carry it back to
the Doji (between A and B). Sometimes the open and close
levels of Dojis are actually a support or resistance
level. Dojis are unique candles because the represent
indecision in the market which is sometimes caused by
support or resistance.
G.
The resistance level found at this point is caused by
the intermediate market reversal. This type of market
reversal is indicative of a market resistance level
because the market price immediately reversed after
attempting to rally. One could also attempt to carry
this resistance level back to the first top on this
chart at A.
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