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Support & Resistance


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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