Do This BEFORE Buying Stocks!
In this video, I break down support and resistance and why it's important for you to know about.
Support shows price areas where buyers step up and keep the price from falling below. Resistance is the area where sellers apply a lot of pressure to keep the price from going above. Knowing how to mark these levels on your charts can help you identify good entry points for your trades!
Support & resistance
In this video I’m going to cover perhaps the most basic form of technical analysis: support and resistance. Having a solid understanding of this will help you know when might be a good time to buy stocks or options to get the most profit.
Since no one really knows which direction a particular stock is going to move at any given time, the best you can do when trading or investing is putting probabilities in your favor by doing analysis.
And I am no expert by any means and certainly not a financial professional, but I think having a firm grasp on support and resistance will help you a lot when it comes to trading.
Analysis can be broken down into three different categories: Fundamental Analysis, Quantitative Analysis, and Technical Analysis.
Fundamental Analysis
Most investors start with fundamental analysis of a company – which is basically evaluating all of the aspects of that business and market it operates in. You would also analyze the assets, both tangible and intangible that the company owns. You would take into account economic factors, like the strength of the economy and industry-specific conditions.
From there, you as an investor could determine if you think the company is undervalued and worth a buy or maybe you find its overvalued and probably not worth buying at this time.
Quantitative Analysis
Quantitative analysis evaluates the historical performance of a company and tells you metrics like Earnings Per Share or Price-to-Earnings Ratio which can also give you an idea if a stock may be over or undervalued. You’d use quantitative analysis in conjunction with fundamental or technical analysis.
Technical Analysis
Technical analysis helps you determine future performance of a stock by analyzing trends and identifying patterns from data. So technical analysis is more focused on the price and volume, whereas fundamental and quantitative analysis are looking more towards the business results like earnings.
Now in this video, I’m going to cover support and resistance, which is a type of technical analysis. Ideally, if you want to invest in the stock market, you’d want to analyze a company using all three forms of analysis, never just relying on one.
What are Support and Resistance?
If you look at a stock’s chart, it’s giving you a pretty good picture of how the price of that stock moves. It shows you where there are lots of buyers, supporting the price and pushing it up and also where there’s sellers, keeping the price from getting to certain levels and even pushing it back down.
Support is generally where you’ll find the buyers, where the stock has trouble falling below that area. This area can stop a downward trend from continuing to fall. I think of it as the floor, supporting price.
If support is the floor, resistance is the ceiling. This is where you can find sellers stepping up and creating downward pressure, making it a difficult area for the stock to go above. This can stop an upward trend from continuing upward.
How to Find It
So in order to find support and resistance, you need to have access to a charting platform. Most brokerages will have this built in. For example, ThinkorSwim has great charting tools integrated into the platform, which makes it really convenient. Even Webull has charting tools… and if you’re on Robinhood, well, you can get look at a chart, but I don’t think there’s any charting tools that you may want. Most traders I know use Tradingview for charting, which is a really great platform and you can start using it for free.
So whatever you use, open it up and type in a ticker you want to analyze.
I like to start by getting a big picture of a stock’s price history.
Here, I’m set to a daily timeframe, meaning each candlestick represents one trading day. I can see how the stock has moved going back several years. I’m looking to see how the stock has been moving over time. Has it been consistently going up? Has it been chopping back and forth in a range and not really doing much of anything? Or has it been straight up parabolic? I also want to see where the all-time high is and where the stock price is now in relation to that all-time high.
So here, I have Adobe pulled up. I can see that after the market dipped it had a nice recovery and hit an all-time high of $536 in the beginning of September. Since then, it dropped to around $438, almost $100 off of its all-time high. It’s tried to push up several times, but has gotten smacked back down by sellers.
But over the last four months, you can see that sellers have been unable to push the price below $438 – in fact, this $456 to $458 area has held nicely.
What I would then do is mark my charts with both the support and resistance. In TradingView, I’m going to use a horizontal ray to mark them.
So now we can see that Adobe’s current price is right around our area of demand. Historically, what happened when price entered this area?
Well here in September, it touched that area and then worked it’s way back up.
When it touched a second time, it actually broke through. This could’ve been related to the presidential election, as the market as a whole was down around that time. Ever since, this area held up the price making it a pretty strong level of support.
Currently, the price is back at this level of support, so we could see a bounce here, or we could also see it break through and continue down.
So going into this next week, I would want to watch Adobe and see how it reacts to this area. If we see buyers stepping up, defending that $458 area, and we are bullish on Adobe as a company and the market as a whole, this may be a good area to buy.
If there is a lack of buyers stepping up here and sellers break through this level, well, we probably don’t want to buy Adobe and wait to see where it moves to next.
This is where you can also pair support and resistance with other forms of technical and fundamental analysis. We can see that it’s in a bit of a bullish pennant formation, with Adobe making higher lows and lower highs – which could indicate a breakout to the upside happening in the near future.
Trendlines
Support and resistance doesn’t just have to be horizontal lines across a chart. Let’s take a look at another example.
Here is 3M on the daily chart. It’s currently 35% off from it’s all-time high of $259. We can see it’s been on an uptrend since March, since it’s creating higher highs, as well as higher lows. But it also looks a bit noisy, with lots of pullback at times and sideways choppy movement other times.
Let’s draw a trend line from this area here in March up and to the right. We want to draw our trendline so it touches as many of these higher low candlesticks as possible. Now let’s draw a trend line touching as many of the higher highs as possible. With these two trendlines drawn, we’ve created a parallel channel, visualizing the uptrend and range that the stock has been trading in.
Also, there’s usually a drawing tool to create a parallel channel – like here in Tradingview, we can do this pretty easily.
Obviously, there are a few candlesticks outside of our channel which is fine because charts are never technically perfect. It just helps us get an overall idea of what might happen next.
This channel can give you an idea of the trend’s support and resistance. If price comes around the top of our channel, it gets hit back down. And conversely, when price comes to the bottom of the channel, it works it’s way back up.
Right now, price is in the bottom of an ascending channel, so if it continues this type of movement, we could expect price to go up and create new highs.
If it breaks down out of the channel, I would probably leave this stock alone.
S/R Flip
Let’s go over one other example, but this time, I want to show you the support resistance flip.
Here on Alibaba, we can see the stock has had trouble getting over this range here. It’ll touch it, and then sellers push it back down.
Once it finally broke through that area of resistance, that area now acts as support. So the stock hit $232 and came back down to retest the breakout. Buyers stepped up in this zone and pushed the price back up. And then it finally broke that $232 range by gapping up, so now we can look for Baba to come back and test this area again, expecting the buyers to step up here.
That flip from resistance to support is something you’ll often see – and it works the other way around as well. Often areas of former support will turn into areas of resistance when a stock drops below that key area.
Fakeouts
Since many traders are using similar levels for support and resistance, a lot of people will set their stop-loss triggers just below an area of support. So basically, they can exit a trade if the stock starts to break below its support. But market makers know this and can push the price lower to trigger these orders before continuing up. This is known as a stop-loss hunt, since the price is essentially getting pushed past these levels on purpose to force out traders.
Practice & Execution
While fairly simple in theory, identifying strong levels of support and resistance is something that takes practice and something that I’m constantly working on getting better at. I recommend pulling up charts of your favorite 20 tickers on Sunday evening and start marking levels of support and resistance on the weekly timeframe. Once you’ve looked at the weekly, you can move to the daily and even hourly timeframes to find the right entry point to buy shares.
The more times a certain level has been tested, the more significant that level is AND if it’s been tested over a long period of time, it’s likely to be a stronger level as well.
The other thing to keep in mind is you can use these levels to identify where you want a stock to be before you buy in.
This requires patience and not FOMO-ing because a particular stock is pumping. You may miss out on a hypetrain to the moon, but you also won’t be chasing a stock that may come back and retest key levels of support.
What I do before the week is mark up my chart with these levels and then set an alert in my brokerage account so that I will know when a stock is coming into a key area.
So here, Wayfair dipped below my support level, so if it comes back up, and I’m bullish on it, I can create an alert to let me know when it does and enter a long position. And we can see it had a nice pump.
Here on Nvidia, maybe I’m expecting another test of the support level, so I can set an alert when it’s at or below $506 so I can keep an eye on it.
Final Thoughts
So that’s the basics of support and resistance. It’s the cornerstone of technical analysis, so I recommend you spend some time going over charts and identifying these key levels. This can help you have a better picture of a stock’s price movement and help you nail your entry to maximize your profit. This works with just about any type of trading, whether it’s options, futures, forex, or equities. But of course, no one form of analysis is fool-proof, so use this in conjunction with other information to help you make smart decisions.