SUPPORT & Part 4: Support & Resistance

RESISTANCE
WEEK 3: SUPPORT AND RESISTANCE, INTRO
TO FIBONACCI

Learn more about Support and Resistance

with this supplemental section from my book
“The 5 Technical Signals You Should Not
Trade Without”

TONI HANSEN’S MARKET

TIMING BOOTCAMP
 Part 4: Support & Resistance

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 Part 4: Support & Resistance

Part 4: Understanding Support and

Resistance
Out of each of the technical tools or signals that are covered in this course, support
and resistance is the most multifarious. As such, I will be spending a great deal of
time on it.

Support and resistance (known as simply “SR” for short) are levels in a stock,
commodity, or index that can easily stall or end a price move. If resistance were the
ceiling and support is the floor, then the closer a person is to the ceiling, the closer
they are to resistance and vice versa. While these levels may seem rather concrete,
with time and continued pressure, support and resistance levels will begin to break
down. In a house, this might have the assistance of rot, termites, or a sledgehammer,
but overall they are places where you can expect a person to typically have a more
difficult time breaking through. Some, however, will be easier to bust than others, just
as rotten wood or glass is easier to break than concrete.

When trading, it is very important to keep an eye on what support or resistance levels
are near at hand. They are instrumental in all aspects of locating, executing, and
managing positions in the market, no matter whether a person is a scalper or an
investor. The closer one is able to buy into a security off support and the further they
are from resistance, the better!

This seems obvious and rather straight-forward right? Well, the confusion tends to set
in when traders begin to try to actually identify and measure those support or
resistance levels. There is such a plethora of types support and resistance and specific
indicators designed to alert a trader to a support or resistance level that it can be
difficult at times to trust that the one which is hitting right now will hold or not, and if
it does, will it mean the end of a price move, or is it just a temporary setback, soon to
be broken with a move to new highs? Well, don’t worry, I’m not going to confuse you
with a lot of new-fangled, highly convoluted, proprietary strategies for identifying
support and resistance and ascertaining the value of those levels. Instead, we’re going
to keep sticking to the basics.

Support and Resistance “Zones”

To start with, how exactly do these so-called support and resistance levels work in the
first place?

One of the most important features of support and resistance levels is that they must
be thought of as “zones” and not exact price levels. For instance, let’s say that we are
looking at $100 as resistance on XYZ. It might only hit $99.89 and then turn around,
or it might hit $100.28 and then reverse. In both cases, it was still at the $100
resistance zone. Simply because it traded over $100 does not mean that the
resistance zone of $100 has broken. This false sense of security has trapped many an
unsuspecting trader long even though their entry is at the highs of a price move.
 Part 4: Support & Resistance

Let’s look at how this idea may

display itself. In Figure 1, we
Figure 1: Support and Resistance Zones are looking at a template for a
support level. For the time
being, it does not matter what
type of support it is. I will get
to types in just a bit.

As I said at the beginning of

this segment, support and
resistance levels are prices
where a movement in a
security is likely to begin to
falter. Several things can happen. It might hold that level and reverse, it might halt a
move and then fall into a trading channel along the S/R level, or it might not show
much reaction at all, breaking through what may have seemed initially as though it
would be a significant support or resistance level.

Let’s go back and review what we have already learned about pace. The slower a
move, the more likely the correction to that move, such as a reversal, is going to be
stronger than the initial move. A more rapid move will have a more difficult time
correcting, so the pace on the reaction will tend to be more gradual.

Pace also plays an important role

in how well support or resistance Figure 2: Support and Pace
levels hold and the types of
reactions a security will have to
those levels. In Figure 2, the
support level is shown in green,
while the price moves are in blue.
On the left, notice the very
pronounced selloff into support.
When that support level hit, it was
able to push against it in a way
that led to some trading just under the exact price of the support level. This is what
may have happened on the opposite side of the spectrum when XYZ traded past $100
and hit highs of $100.28 before turning around. In essence, the more rapid a move is
as it heads into a support or resistance level, the more “give” that support or
resistance level has.

In the image on the right, however, the support holds perfectly. This is because the
security had a long and steady move into the support and the momentum or pace of
that move was fairly gradual. Although some support or resistance levels will hold to
the cent or to the tick, most do not and will treat it with a bit of leeway. When basing
entries and exits on support or resistance levels, it is very important to take this into
account. Think of them a bit like you would a trampoline. The fabric of the trampoline
is your support level. If you are just bouncing on it, the trampoline may only move
slightly lower than its resting state. If you jump onto it, however, that support level
will show its greater elasticity. With too much use or too heavy of a load, it will break.
 Part 4: Support & Resistance

Categories of Support and Resistance

There are two categories of support and resistance that I will be discussing in this
course. The first is price support and resistance, while the second is indicator support
and resistance. Each of these can also be
Support & Resistance Types: subdivided. While price support and resistance
levels tend to be fairly straightforward, there are
Price S/R still 6 different types that I will be covering. When
Indicator S/R one starts looking at indicator support and
resistance, however, these are mathematical
calculations that are based on a security’s price and/or volume and there is a veritable
smorgasbord of these types of tools available to choose from.

Price Support and Resistance

First I’m going to start by covering the different types of price support and resistance
that one will come across while trading or investing. These include

o (Whole) Numbers,
o Prior Highs and Lows,
o Prior Congestion Zones,
o Gap Zones,
o Trend Channels or Trend Lines, and
o Equal or Measured Moves.

Number Support and Resistance

The first of the six types of price support and/or resistance deal with some form or
another of price support and/or resistance, such as whole numbers.

Examples of whole number support and resistance levels are $1.00, $5.00, $10.00,
$50.00, $100.00, etc. These are pretty obvious support and resistance levels because
most people think in terms of whole numbers. It’s rather unusual for an investor to
call up their broker and say, “Hey Joe, when AAPL gets to $102.26 can you get me
out?” Analysts and market personalities also set price targets at whole numbers for
the most part. At the time this course was compiled for instance, JPMorgan, had just
issued a price target on Apple Computer Inc. (AAPL) of $100/share, while Goldman
Sachs issued a $68 price target on Target Corp. (TGT) and an $18 target over the
following 12 months on Motorola Inc. (MOT). Notice that each of these is given in
terms of a whole number. Goldman Sachs didn’t give a target of $67.86 on Target. It
was $68 exactly.

Many times traders also place their trades based upon these whole number levels.
How many times does someone hear something like, “Oh, when XYZ breaks above $50
then I will buy it.”? Fewer would say, “Well, I know it has a high of the day of $50, but
when it breaks over $49.90 then that is when I’m going to buy it.” Never mind the fact
 Part 4: Support & Resistance

that the second trader will often have the advantage, and can do so without added risk
when he or she uses the tools from this course.

I’m going to show you this more specifically later on, but the general idea is that if a
stock rallies into $50, and then falls into a range just under that resistance, then it’s
the last segment of that base that should be used as a trigger for a breakout, not the
$50 whole number itself. If I wait for that whole number to break, then I often have to
chase and my reward compared to my risk gets cut in half. Something that could have
given me 4 times my risk will easily end up only rewarding me with only twice what I
had risked, if not less, although the odds on getting stopped out on one versus the
other will often be very comparable.

When looking at the cheaper stocks, often those trading under about $30/share, then
20 to 50 cent increments will also experience support and or resistance as they hit. A
good way to tell which it will try to hold is to scroll back and check out the past week
or two of trading, paying attention to the average price moves as well as the average
ranges or corrections. If a stock tends to stall most often every 50 cents, then if it is
trading $27.00, it could be reasonably assumed that it will stall again, if not reverse,
at $27.50. Other stocks will like the whole numbers and then the 20¢, 40¢, 50¢, 60¢,
and 80¢ price levels and stall most often as they hit. More expensive stocks with a
larger intraday range may only gravitate towards increments of $5 or $10, such as is
the case with Google (GOOG).

Of course, the number price support and resistance applies to other markets as well,
such as oil prices. An example I came across the day I compiled this segment of the
course was a discussion regarding oil trading down to $50/barrel. Technically it fell to
$49.90 intraday and then closed at $50.48, even though $50 is the number they
focused on. Analysts then went on to identify $48/barrel as the next key support level
for crude prices.

This type of price support and resistance also applies in the indices themselves. The
Dow Jones Industrial Average, for instance, often gets a lot of attention. Since 1999
the 10,000 and 11,000 have served as both support as well as resistance.

Additionally, the index futures contracts react well to this type of price support and
resistance. In the NQ, for instance, it is common to see this NASDAQ E-Mini contract
react to prices in 5 point increments, such as 1810, 1815, 1820, 1825, etc. I have a
great example of this that I will be covering in a few minutes.
 Part 4: Support & Resistance

Figure 3

The first chart in this segment which illustrates price support and resistance in the
form of whole number support and resistance is one of Alliance Data Systems Corp.
(ADS) (Figure 3). It shows some great examples of how whole number support works
when a trend in under way. Initially the whole numbers in ADS served as resistance on
attempts to break higher, first at $54 and then again at $55.00, which held into the
next morning. On July 20th ADS fell quickly out of the open. That selling continued
until about 10:00 ET when it hit $52. The stock then began to congest along that price
support before breaking down again into the 11:00 ET correction period. A second
correction off lows began at that time and ADS bounced back into the $52 zone.

ADS resumed its selling in the afternoon, again forming several waves of downside on
the 5 minute chart. $50 is an obvious whole number support level and ADS formed a
small bear flag into 14:30 ET as it reacted to that support, breaking down a final time
into the 15:00 ET correction period where whole number support once more played a
significant role. The term “bear flag” refers to a very gradual counter-move within a
larger move lower that represents a continuation pattern on the downside and when it
broke lower the $49 level held very well. Notice that the stock traded under the exact
whole number by a few cents more this time than at the prior whole numbers. The
increased pace on somewhat elevated volume into 15:00 ET played a roll in this.
 Part 4: Support & Resistance

Figure 4

When dropping down to look at this same type of activity on a cheaper stock such as
Ultra Clean Holding, Inc. (UCTT), then the 50 cent increments can be just as
compelling as the absolute
whole numbers as a reason
A tick is the minimum upward or downward movement for a stock to react. As 2006
in the price of a security. In the currency market this is wound to a close, UCTT
called a pip. found itself in a congestion
type of move along $12. On
December 29th, the stock
Security: Tick Size: was trading in the upper
end of that range and $12
Stocks $0.01 served as support
throughout the mid-day.
NQ 0.25 = $5.00
UCTT gapped higher with
ES 0.25 = $12.50 the start of the new year on
January 3rd. The $13.50
YM 1 = $5.00 zone stalled the opening
continuation and as the
5,10-yr T-Notes 1/2 of 1/32 = $15.625 stock corrected off those
highs, the $13 whole
30-yr T-Bond 1/32 = $31.25 number held. UCTT then
returned to the $13.50 zone
Grain Futures 0.25¢ per bushel where it continued to chop
around, flushing once back
Euro FX 0.0001 = $12.50 into $13.00 before the end
 Part 4: Support & Resistance

of the day. When the $13.50 level broke the following afternoon, that level then
became support.

On January 8th the congestion once again broke on UCTT, leading to new highs on the
year. $14.50 stalled the move initially, but the stock was soon trading at $15.00 and
the $14.50 level became support. That last channel shown here from the 8 th to the
10th broke higher on the afternoon of the 10th, leading to the final test of this form of
number support at the 50 cent levels. In this case it was the $15.50 level which held
throughout the afternoon on the 10th.

The highs and lows of the days which followed, as well as over the previous year, also
tended to gravitate to within a few cents of these 50 cent barriers. Since some stocks
will favor the 20 cent increments over the 50 cent ones, it is important for me to just
take a second to check recent trading to see what increments of number support are
most favored by the stock I am examining.

The concept of number support and resistance is not limited to stocks alone. Many
other securities also react to prices in this manner. For instance, in trading the
NASDAQ EMini contracts, I quickly realized that the NQ often tends to move in 5 point
increments. Highs and lows are often made within a tick or two of these levels and the
prices often fall into a period of congestion resulting from a stall at one of them. A tick
is the smallest move a security can make. In stocks it is a penny. In the NQ it’s a
quarter of a point, which is worth $5.00.

Figure 5

The chart displayed in Figure 5 illustrates how the NQ reacts to the 5 point
increments between 1845 and 1860. These include 1845, 1850, 1855, and 1860. At
 Part 4: Support & Resistance

the beginning of the time period shown here, the NQ is rallying strongly higher out of
the 1840 zone. It barely pauses at 1845, stalling for only a minute before moving into
the 1850 level. At this point the NQ also pauses only briefly, but it is more noticeable
than at 1845, creating what is referred to as a “narrow range bar” right after 11:00
ET, marked here as “1”. The fact that the middle of that narrow range bar and
congestion is divided almost perfectly by the red line indicating 1850 shows how it
gravitated to that number even though the price fluctuated slightly back and forth
when it hit.

The next locale where the NQ ran into price resistance of this sort was only 10 minutes
later at 1855, marked as “2”. The momentum into this resistance was very strong,
with the sharpest upside pace of the entire morning rally. This resulted in more “give”
as the 1855 level hit, allowing the NQ to move above 1855 for just a minute before
rebounding. This is similar to as if someone had jumped from a great height onto the
trampoline I mentioned earlier. It pushes the support from the fabric of the trampoline
closer to the ground, increasing the support zone from the fabric that is acting as the
actual support. In the 1855 example of the NQ, the increased momentum pushed
against the resistance level to increase the zone of that resistance.

After reacting to the 1855 level, the NQ pulled back for the remainder of the morning.
The momentum was lost during this time and the 1850 level held perfectly at “A”,
corresponding to the 12:00 ET correction period. The pace was also slow heading back
into the second test of 1855 at “3”, which held with a correction period as well. This
time it was the 13:00 ET one when many traders returned from their lunch break.

The pace within the mid-day range turned over as the NQ consolidated. Initially the
bounce off lows at “A” was just as strong, if not stronger than, the move into them.
After pulling back, however, the continuation on the upside within the range itself was
significantly slower than that previous bounce and it was this last move within the
range that spelled its doom. It does not take much notice for a market bias to turn
and the drop at 13:00, marked “3” was simply too strong for the index to uphold its
previous support level of 1850. Even though it did have a nice reaction to that level at
“B”, where it hugged the support for a good half an hour, that support broke as the
afternoon wore on.

The example of price support at “B” when the NQ came back into the 1850 level was
very similar to when it hit it for the first time earlier in the session. Even though it
pushed the limits of the support zone briefly after it retested it, the congestion
dissected that price almost perfectly, breaking lower just before 14:00 ET.

As the market closed in on the 14:00 ET correction period, it also closed in on the next
price support at 1845, marked “C”. The price support held within a mere tick of that
level, bouncing back strongly into the 1850 zone. As in “1” and “B”, the NQ formed a
small congestion zone that was dissected by the price level before continuing.

The return to the prior highs of 1855 at “5” again held within a tick and again
corresponded perfectly to a correction period. This time it was the 15:00 ET correction
period. Notice that tests of 1855 at both “3” and “5” were less flexible than the first
time it hit at “2” and held almost exactly. This is very typical and confirms the 1855
level as the real resistance from number “2” because the subsequent tests of that level
were more subdued, yet held it exceptionally well.
 Part 4: Support & Resistance

The first time a resistance level hits heading into congestion is typically when that
resistance has the most “give” to it. Subsequent retests become mellower up until the
point that the resistance breaks. Often the final tests of the resistance zone may not
even hit the exact price, but will fall slightly short of it, such as hitting $49.92 instead
of $50 when $50 is the whole number resistance, or 1854.5 in the NQ instead of 1855
when 1855 is the true resistance.

The sharpest downside move took place between 15:00 and 15:30 ET. This
momentum move again pressed hard against support at 1845 at “D”, pushing it the
furthest before bouncing back again into the last half hour of trading. Unfortunately,
many traders will set orders several ticks on the opposite side of a support or
resistance level, assuming that is enough to conclude that it is broken. This works
fairly well if the security has been pressing up against that level for awhile, but does
not work as well when it has had a decent-sized move already by the time that level
hits. For instance, if I were wishing to buy XYZ over $50 on an intraday setup and it’s
been trading at the $50 zone for an hour, then placing an order to buy at $50.07 has a
good chance of being a successful entry point for a breakout setup. If, on the other
hand, I am looking to buy that same security over $50 and it runs from $49.25 to
pierce $50, then my order to enter at $50.07 is at a much greater risk of executing
near at least a moderate intraday high, since it may simply hit highs of $50.17 or even
$50.23 and then reverse.

Let’s look at these same types of scenarios on this chart of the NQ. In the first
scenario, instead of basing along $50 in a security and then breaking, letting me put a
buy order in at $50.07 or even better and be reasonably confident in the success of
the breakout, the NQ based along support in the early afternoon from where it hit the
1850 support just after 13:00 until it broke it just before 14:00. If I drew a line
connecting the lows along that support, I could take a short after that support broke
by half a point and feel strongly that the breakdown would work out well.

In the second scenario the security moved from $49.25 and through $50. The NQ
equivalent to this was the late afternoon descent from 15:00 to 15:30. If I had placed
a short order under the 1845 level by half a point, I would have quickly been
regretting my decision. This is because the move into that support was much more
exhausted than on the previous break of that same support level earlier in the
afternoon.

On the second day of trading displayed here, the NQ did not hold the price support
and resistance levels quite as well as on the first. The NQ continued its previous
afternoon’s buying out of the open, stalling only briefly in the 1855 zone before
continuing onward, finally breaking that resistance level that had plagued the index
throughout the prior session. It fell just a hair shy of 1860, however, (marked “7”
here) before falling back into the larger trading range. There were momentary
reprieves in the correction at each of the price support levels as the NQ made its way
back to the lower end of the range, but after making new highs, it found it
unnecessary to strongly test the lower support of 1845 before turning back around
with the 10:45 ET reversal period and making its way higher for a better test of the
1860 level, marked “8”.

I am often leery of trading reversals that do not securely test a significant support or
resistance level. There is a more substantial risk that the security will come back and
attempt a stronger test of those price levels before committing to a true price reversal.
 Part 4: Support & Resistance

It is very important that there are a lot of other pros working in my favor in the times
that I do not wait for that stronger test. Otherwise I will either enter with a smaller
position, looking to add when I can and thus guaranteeing that at least I do not miss
the setup. On the other hand, I might just keep a wider stop to prevent me from
getting flushed out easily if it does come back to try the support or resistance level to
a stronger degree.

It should be noted (and this very important), that when a security falls just shy of a
support or resistance level initially and then corrects slightly before retesting it more
strongly, that the next test will often push the price support or resistance more than if
it hit it solidly the first time. So, if XYZ hits $49.87 and then pulls back to $49.50
before trying the $50 price resistance again, it might hit $50.17 easily before
reversing. On the other hand, if it goes directly to the $50 zone without stalling
prematurely, then it will be more likely to only hit move to something closer to $50.04
or so before reversing.

Prior Highs and Lows as Support and Re sistance

The next type of price support and resistance is when a security reacts to a prior high
or low that was made at an earlier point in time. It may be as little as a few minutes
earlier to be of importance to a scalper, or as long as several years ago for the
position trader or investor. To a scalper, that zone of prior highs or lows as support or
resistance may be only a few cents or a few ticks, but on a larger monthly or yearly
time frame the “zone” of the support or resistance could be $5 or more. If a stock has
a high several years ago of $309/share, then it could be considered to be in the zone
of that resistance when it is trading $295/share, with the assumption that the price it
was attracted to was $300/share and it’s not uncommon for a stock to stall just shy of
the absolute high of a previous high.
 Part 4: Support & Resistance

Figure 6

This chart of the NQ (Figure 6) shows a combination of the number price support and
resistance as well as how prior highs and lows will affect a security’s price action. First
take a look at the price level labelled “A”. This is number support and resistance at the
1590 zone. It hits that zone at the lows at the left of the chart at the 15:00 ET
correction period. The NQ plunged through that level when it tested it again into the
15:30 ET correction period. After hitting lows around 1565 (“D”), the NQ bounced
back. It hit the 1590 level around 10:00 ET. This previous low, which had once been
considered a support level, now became resistance. Even when it tried again to break
it just half an hour later it was not able to.

The NQ finally gave up and began to reclaim a large chunk of the morning gains. A
mid-day lows was established at about 11:30 ET (“C”) and another high was made
with the 12:00 ET correction period at “B” as the morning range narrowed
dramatically. These pivots would continue to provide support and resistance
throughout the remainder of the session.

Now let’s back up and look at each of these levels one by one.

First there is “A”. The first example of this form of support and resistance occurred
when the low at 15:00 ET was hit the next morning, serving as resistance, but it didn’t
stop there. The NQ held that level that time around, but it tried it once more later in
the day, just before the close at 15:45 ET. As before, the price level continued to act
as resistance. This time it held the absolute price resistance even more closely as well.
 Part 4: Support & Resistance

The second pivot was the one near the open on the 24th in the 1565 zone, marked as
“D”. This was hit for a second time at about 12:45 ET. While the price did ultimately
break, it took nearly 45 minutes of testing and retesting the support before it was able
to do so. It only took a few minutes, however, for it to pop right back over that
support. It hit that level again around 14:30 ET and held it perfectly for the remainder
of the session.

The mid-day low at 11:30 ET at “C” was the resistance later in the afternoon when the
NQ hit the support from “D” and fell into a range. It slowed the move back upward
around 14:00 and then as support at 15:30 ET.

Finally, the 12:00 ET pivot highs made at noon at “B” stalled the late afternoon rally
back into that price level at the 15:00 ET correction period, halting the rally until the
final correction period at 15:30.

Bonds respond very well to prior highs and lows as price support and resistance as
well. Figure 7 is a chart of the 10 year note spanning from late August to mid-
December 2006. The 10 year note started off in a trading range in September. The
support begins with “A” and as the range continues, those lows are tested again at “B”
and hold to the tee. Even after the range breaks higher, when the 10 year comes back
into those lows in the second half of October, they continue to hold.

The highs of the late August-early September range also serve well throughout the
remainder of the year. The third test of the highs breaks the range, but serves as gap
resistance again in mid-October, a temporary high in late October, and support in
early November.

When the 10 year broke higher in late September, the highs made on that rally
continued to plague the would-be bulls for the next two months (at “5, 8, 9 and 10”).
It finally managed to shake free at the very end of November, but got stuck there
again in December (“E”).
 Part 4: Support & Resistance

Figure 7

Congestion Zones as Support and Resistance

Prior congestion zones are similar to prior highs and lows, but there is often greater
leeway, with a much larger zone involved, so a trader has to use more caution in
deciding how to approach them. Essentially, what I am looking for when I am using
this type of support or resistance are areas where a security fell into a trading range
and bounced back and forth for awhile before breaking out.

The intraday chart of Ashland Inc. (ASH) in Figure 8 demonstrates just how sloppy a
congestion zone can be and how the reaction to it can also be more hesitant. The
congestion zone itself is shown in blue and takes place throughout a large chunk of the
first day. That congestion broke higher late in the day and continued into the open of
the second day before the bias reversed and the price began to fall. The pace of the
selling slowed right as the upper end of the congestion zone hit around 11:30 on day
two, but the middle of a congestion zone is actually the best support or resistance and
it continued to press lower until that hit around 12:15 ET.
 Part 4: Support & Resistance

Figure 8

The fact that the middle of a congestion zone is the strongest part of a congestion
zone is extremely important. Many traders will take breakout types of patterns, buying
a break higher out of a trading range or congestion zone. They will then quickly move
their stops to breakeven. So, think about this for a minute… Let’s say I bought a
breakout from a trading range in XYZ where the range was from $49.50 to $50 and
my target is $51. It then rallies to $50.25 and I begin to panic and think that I should
not take a loss at this point. After all, I’ve covered half
my risk, so I move my stop to breakeven. What
TRADE TIP: potentially fatal error in judgment did I just commit?

The middle of a
Well… First off, there are actually two of them. For one
congestion zone is the
thing, $50 is whole number support, so if I got into the
strongest part of it for
support or resistance. position at $50.03 and move my stop to $50.03, I am
placing my stop right at a substantial support level.
I’m practically begging to get flushed out. Even if $50
breaks, it’s likely to see some sort of reaction to that
price level first.

Secondly, that support level could very easily bust before the buying resumes. Since
the middle of a congestion zone is often stronger support than the upper end of the
zone, XYZ may easily stall for a bit at $50 and then break lower into $49.75ish before
bouncing back strongly and moving non-stop from that point straight into my target of
$51. This is where I used to be frustrated time and again for getting out at EXACTLY
THE WORST POINT POSSIBLE! Only now I finally know why! Once a trader reaches
that point, it’s much easier to avoid the same mistakes the next time around… and
there is ALWAYS a next time!
 Part 4: Support & Resistance

Figure 9

Now, that said, let’s look at another example of congestion zones as support and
resistance. Figure 9 is also from Ashland Inc. (ASH). In this example there are
several areas of congestion to explore. The first takes place for about an hour from
14:00 to approximately 15:00 ET on day one. That congestion breaks briefly down
following 15:00 ET. The lower end of the congestion zone waylaid the reversal off lows
around 15:15 and then the middle of it slowed the reversal a bit after 15:30 ET.
Neither was exceptionally significant in that they had very little impact on the outcome
since the congestion zone provided only minimal resistance for the stock as it rallied.
It became more important, however, when the stock retraced the next day. After two
waves of selling the following morning, ASH once again came back into that previous
congestion zone at about 10:30 ET. This time the stock reacted very well to the
support zone provided by the earlier congestion, creating a bear flag before it was able
to manage a break of the support into 11:00.

The second congestion zone singled out on this chart is briefer than the first, but is
easier to follow in real-time since it is closer to text-book perfect. It lasts for only
about 20 minutes at the end of day one. ASH moved sharply higher out of the range
the next morning. After rounding off at highs, it pulled back into that congestion zone
just as quickly as it left it, hitting it at about 10:00 ET. Notice that it pulled back into
the middle of the congestion before bouncing. After the pattern, known most
commonly as a Head and Shoulders, broke lower, that same congestion zone which
served as support became resistance at about 11:35-11:40 ET.
 Part 4: Support & Resistance

Gaps and Support and Resistance

A fourth type of support and resistance deals with gaps and gaps zones. In order to
understand this type of support and/or resistance, however, a trader has to have to
have a solid understanding of what a gap is.
A “gap” is a break
A gap is break between prices, either higher or lower, whereby between prices,
no trading occurred between the two price levels. Gaps vary either higher or
greatl lower, whereby no
y in trading occurred
Image 10: Gap Sizes terms between the two
of price levels.
both
their size and the reason
behind the gap itself. For me,
a typical gap would be one
that is less than half an
average day’s range in a
security, although in some
cases it might be slightly
larger. These will tend to fill
more easily than a gap which
is 1.5 to 2 times an average
day’s range, unless it’s in the
indices (such as in the S&P
500 or Dow Jones Industrial Average), in which case the more extreme gaps will
typically fill prior to the afternoon on the day of the gap.

Gaps are very common overnight when a stock or index closes at one price only to
open at another. The majority of the trades that I take intraday in equities are based
upon a gap which occurs overnight in individual stocks. The chart of Redback Networks
Inc. (RBAK) in Figure 11 has several nice examples of gaps on a daily chart. The first
one is fairly average, but the gap leads to a breakout from a trading range on the daily
chart and thus holds very well. That momentum from the breakout then follows
through with a more substantial gap into the next morning. Another breakout gap, this
time on the downside, took place a few weeks later. It also led to a multi-day move in
the direction of the gap.

Gaps can take place intraday as well. One way in which this happens is when trading is
halted due to news and then resumes trading at a different price. In Figure 12,
Expedia Inc. made a mid-day announcement for a 30 million share buy back.

Trading was halted just under $19/share and resumed at $20.00. This is a dangerous
gap to play for most traders in the immediate aftermath of the announcement because
obtaining an execution at a desired price is extremely unlikely due to the obscene
volatility which follows such a move. It is much safer to play the secondary reactions
to the news.
 Part 4: Support & Resistance

Figure 11

Figure 12

A third type of gap is also one that can occur intraday, although it can also be seen on
exceptionally thin stocks on the daily time frame as well. It happens when a thinly
traded issue trades with a wide spread. The spread, which is the difference between
the bid price and the ask price, can lead to trades at both levels with very little in
between. Figure 13 contains this type of gap on OYO Geospace Corp. (OYOG), a stock
most of you have probably never heard of and will never look at again. It went from
trading just over $53/share to trading over $53.50/share with the next posted
 Part 4: Support & Resistance

transaction. From a day-trading perspective, securities which trade in such a manner

are best when avoided altogether.

Figure 13

Figure 14
 Part 4: Support & Resistance

Gap zones work very much like congestion zones when used as support or resistance.
In fact, this first example of gap support in Figure 14 is also one illustrating
congestion support (as well as number support for that matter). On day one, the NQ
spent most of the session revolving around the 1645 level. It gapped substantially
higher the next morning. As with most of the above average gaps in the indices,
however, that gap favored being filled. It spent most of the morning, as well as the
early afternoon, accomplishing that feat. It finally succeeded at the same time as the
13:00 ET correction period hit. The combined support from the gap, the congestion
and the 1645 price level led to a nice bounce as the afternoon progressed, pulling
higher right out of that 13:00 correction period.

Cryptologic Inc. (CRYP) (Figure 15) also deals with gap support and resistance, and
again displays how it goes hand in hand with the other forms of price support and
resistance discussed thus far.

The first gap is a rather large one, taking place in March. The stock had been moving
higher for several days and then gapped up by more than $2.00. There are a couple of
ways that a gap will hold as support or resistance. The first is with an absolute return
to the closing prices the day before the gap, and the second is a return to the highs or
lows of the gap in the case of the more extreme gaps. Both work equally well and
should be taken into account. The first gap here is more extreme, so when the stock
pulled back into the highs the day before the gap, those levels held very well. It hit
them initially three days after the gap, but then hit a second time a couple of weeks
later (marked as “1”). Even months after a large gap occurs on a stock, that level
continues to be viewed as significant and is reflected in the subsequent price activity
on the stock.

Figure 15
 Part 4: Support & Resistance

A third larger-than-average gap on CRPT occurred within a week of the second one. It
is marked as “4” on the chart and was the largest of the three. As time passed, CRYP
experienced another significant upside gap (marked as “2”). This second one was in
early May. Notice that the lows on the day of that gap were the same as the highs the
day before the gap back in March. The congestion which followed throughout late May
and most of June also corresponded to these gap levels. The closing price for the gap
marked as “2” from early May went on to serve as support for the lows of the
congestion which followed (“6” and “8”). The stock gapped smack into prior highs,
hitting its head solidly on that ceiling with the $29 number resistance looming right
there as well. As in the first gap, which was also following a several day rally, the gap
soon began to fill, completing the closure on the third day (“5”). By this time, it should
come as no surprise that this zone also served as resistance a couple of weeks later
(“7”).

Trend Channel and Trend Lines as Support and

Resistance
The fifth type of price support and resistance can get a bit trickier than the previous
ones. This type deals with trend channels and trend lines. A trend channel is like a
trading range… Just tip it over a little bit.

Figure 16 demonstrates a nice uptrend channel. To draw the trend channel, connect
the zone of the highs of a price move and then connect the lows of a price move. As a
security approaches the upper zone of the trend channel, then it is considered to be at
resistance, whereas when it moves towards the lower end of the trend channel, then it
is hitting channel support.
 Part 4: Support & Resistance

Figure 16

Figure 17

Figure 17 shows a textbook downtrend channel.

 Part 4: Support & Resistance

Trend channel support or resistance should always be used in conjunction with another
form of support or resistance to provide greater accuracy. Very few trend channels are
as consistent as the one shown here. Notice that, as was the case of the uptrend
channel, the pace of the moves back and forth within this downtrend channel are fairly
similar from one to the next. When the pace within a trend channel changes,
becoming either significantly weaker or stronger than the previous price action, then
this form of support or resistance becomes less reliable.

A trend line is a bit more exacting than a trend channel. A trend line is often used to
bracket a trend channel, but while the channel is focusing on the general range of the
channel, a trend line technically should not pierce any price. In other words, you are
supposed to connect one low to the next, including any tails, and extend those lines
either upwards for an uptrend, or downwards for a downtrend. A picture-perfect
example of this can be seen on the YM in Figure 18. The trend line that was in place
from 10:45 to 12:00 ET held exceptionally well throughout most of the afternoon.
Every single time that trend line hit, the YM bounced right off it. When it finally did
break in the last hour of trading, the former uptrend line then became resistance.

Figure 18
 Part 4: Support & Resistance

Figure 19

Figure 19 offers another look at trend lines as support and resistance, showcasing
them as trend channels as well. Even though the channels widened, the price levels
when the YM hit the trend lines held almost perfectly. When the channels turned over,
moving from an uptrend channel into a downtrend one, the prices began to favor the
lower end of the uptrend channel before it broke lower and then that uptrend line
served as resistance and the start of the upper trend line on the downtrend channel
(“1”).

As I mentioned earlier, though, even in a perfect trend channel, it’s better to have
another form of support or resistance to help back you up. In the downtrend channel,
the YM hit the lower downtrend line at “2” just after 13:30 ET, but it still broke that
low before it was able to bounce into what would become the upper end of the
downtrend channel at 14:00.

Equal and Measured Moves as Support and

Resistance
The sixth type of price support and resistance that I use is based on the concept of
equal, or measured, moves. I trade a lot of breakout and continuation types of
patterns and over time I noticed that the continuation would often mimic the prior
move, so much so that I could even predict the highs following an upside breakout
 Part 4: Support & Resistance

from a base or bull flag to within a few cents. This was done by simply paying
attention to the type of trading that had taken place earlier on the time frame I was
interested in and looking at how the current action was shaping up.

This first chart of SCHN (Figure 20) shows one nice variation of the equal move
scenario that traders will come across. SCHN was a stock that I had been trading
intensively at the time and after selling off strongly in the morning on October 2nd, it
had reversed at 10:00, pulling higher and then falling into a congestion between
around 10:30 and 11:15 ET. The correction had attempted a premature breakout
around 11:00, but had fallen back before taking off to new highs after 11:15 ET.

The tool of equal or measured moves is one that I had never heard of before I
stumbled upon it as a result of analyzing my trade journals and have still never read in
any other venue, and it took me a bit of time to begin to use it successfully even after
it caught my attention. Through trial and error, I discovered that using the second low
within a congestion zone or period of range-bound trading and taking the move out of
that low to compare to the move into the congestion zone is the best way to maximize
my success unless the lows which follow are slightly lower. Then I will use those
instead. If the first low is the lowest, however, I will skip that one.

In SCHN, this meant first measuring the rally out of 10:00, marked here as “A”, and
then comparing it to the move which began around 11:15 ET. The first low was at
about 10:50. I then take the price of that low and add the amount of the price move
from the original rally. The low of “A” was made at $31.03 and the highs of the move
were at $31.39, yielding an overall move of $0.36. The low of the second move,
marked “B” was at $31.29. Adding $0.36 to that level indicates an equal move
resistance at $31.65.
 Part 4: Support & Resistance

Figure 20

Figure 21
 Part 4: Support & Resistance

It is here that the concept of pace comes back into play. In order for the equal move
type of resistance to hold well on SCHN, the rally marked “B” would need to be nearly
identical in terms of the pace involved in the move as it was on the first rally marked
“A”. In other words, the buying on “B” could not be significantly stronger, or weaker,
when it began than it was earlier in the session. On SCHN, it did not have that
problem and the highs established just after 11:30 ET were at exactly $31.65… a
perfect equal move. The impact this strategy can have on predicting targets on
breakout and continuation types of patterns is indispensable.

As the day wore on, the morning equal move was not the only one to occur during the
session. After pulling back sharply on the 5 minute charts into the 12:00 ET correction
period, SCHN again began to fall into a zone of congestion. Shown here in Figure 21,
this time the range was much narrower than before, not really offering the same type
of pivots back and forth with which to use to measure a move. So for this case a
trader can simply use the highs of the range itself for comparison.

The drop into the mid-day base took place from approximately 11:30 to 12:00 ET,
moving from highs of $31.65 to a low of $31.35. This represented a decline of 40¢.
The highs of the range just prior to the breakdown were established at $31.35. This
meant that an equal move would be complete when the stock hit $30.95. Once again,
the pace on the continuation move, marked “B”, was very comparable to the one off
the morning highs, marked “A”. The second move in this case also managed to hold
perfectly, bouncing at exactly the $30.95 level with the 14:00 ET correction period!

Figure 22
 Part 4: Support & Resistance

The concept of equal move support and resistance is also one that spans all markets,
and it works just as well in the indices as in individual stocks. It also works well in
FOREX and the bonds market. Figure 22 is a 1 minute chart of the QQQQ, which
tracks the NASDAQ 100 Index. On Sept. 28th it turned around off early morning highs
and began a solid move lower as the morning progressed. After returning to the
congestion from the prior afternoon it made a short-term low just after 9:50 am.

The NASDAQ retraced about 50% off the early morning lows. The congestion began to
favor the lower end of the range from about 10:30 onward before breaking to new
lows on the day. In order to guesstimate a target on this breakdown, a trader can step
back a minute and re-examine the initial decline off highs. This began at 9:37 am at
$40.89 and continued until 9:51 at $40.63. This was a move of 26¢. The range was a
bit on the choppy side, but the third high was slightly higher than the second one, so
this is the one that I used to begin measuring a second move in the direction of the
earlier decline. It started at 10:25 with a high of $40.80. Subtracting 26¢ yields a
price target of $40.54. The overall momentum of the breakdown was again extremely
similar to the first and the equal move target again held perfectly at $40.54.

Not all price continuations will hold this equal move level as perfectly as on SCHN and
the QQQQ, however, so it’s imperative for a trader to be able to identify the situations
in which such a move is not as likely as early as possible in order to adjust their
expectations and maximize their gains. In this endeavor, we must go back to our
section on pace once more. I have already mentioned that for the equal move scenario
to hold, the breakout or continuation must mimic the prior price move in terms of
momentum. When that momentum is not comparable, however, then a continuation
can yield either a larger or smaller move.

First let’s look at what will happen most of the time when the pace on a breakout is
slower than the momentum heading into a congestion or pullback in a larger price
move. Figure 23 contains a chart of the SPY, which tracks the S&P 500 Index. It had
a strong upside move coming out of the 12:00 ET correction period. This move itself
on the 2 minute time frame took the form of two waves. An initial rally was followed
by a continuation shortly thereafter. The continuation had the same pace as before
and culminated in an equal move into the 13:00 ET correction period.

At that point it began a longer correction into the 14:00 ET correction period. After
establishing a second low within the trading channel, the SPY broke to new highs.
Initially the pace on the breakout was similar to the move heading into the range, but
the SPY pulled back into the middle of the congestion again before continuing,
breaking the momentum. The rally continued, but it was unable to maintain the
strength of the morning rally. The pace slowed significantly after the 15:00 ET
correction period and eventually turned over, selling off a bit into the close.

The morning rally from 12:00 to 13:00 began at $131.24 and hit highs of $132.37.
This was $1.13. The low of the afternoon breakout was at $132.11. The afternoon
highs were $132.85. The overall move was $0.74, only 65% of the prior rally. The
inability for the SPY to hit that equal move was tied directly to the fact that the pace of
the breakout was unable to sustain itself.
 Part 4: Support & Resistance

Figure 23

Figure 24
 Part 4: Support & Resistance

The same thing happened on the daily chart of PW Eagle Inc. (PWEI) in Figure 24.
PWEI had a strong momentum move in December of 2005. Then it fell into a trading
range until March. As the range broke highs, the pace once again slowed as compared
to the rally from the prior year. That first rally was nearly 19 points ($19). By taking
the third low of the range, which was similar to the second, and adding 19 points, it
suggests a breakout target of about $37. Due to the slower pace, however, the stock
fell short of that target, stalling instead at the $32 price resistance. This was less than
75% of the prior move.

Figure 25

Pace can also affect a breakout to the extent that a larger than equal move results.
This happened on Abercrombie & Fitch Co. (ANF) on this 5 minute chart in Figure 25.
ANF had broken lower to continue a larger downtrend in the early afternoon of July
12th. It then fell into a trading channel throughout the remainder of the session. That
range broke lower with a gap into the 13th, kicking off a continuation move in the
direction of the larger price move.

In examining the moves, the decline ahead of the trading range, marked “A” fell
nearly a point before holding lows heading into the range. The stock put in a slightly
higher high just before the close than the second high within the range, so this is the
one which works the best for determining an equal move on the continuation. Hitting
at just over $54.60, it implies a target zone of $53.60. The gap, however, increased
the pace of the downside move dramatically, and the stock continued to fall until it
came into the zone of the $53.00 whole number support. The decline on wave “B” was
approximately 50% larger than the prior downside move.

The concept of an equal move is one that is highly valuable when accessing a potential
target on a position, but when the pace of a breakout is either faster or slower than
before, it makes it necessary to rely upon other forms of support and resistance to
 Part 4: Support & Resistance

assist in adjustments to the initial equal move target analysis. The whole number
support and resistance in the last couple charts are great examples of that.

Figure 26

Advanced Micro Devices Inc. (AMD) in Figure 26 is a nice example of how varying
pace can affect a price move as it develops. The first rally here, marked “A” is fairly
average. The stock was followed by a triangle range which formed into the close. That
range broke higher into the next morning on move “B” at a much stronger rate of
change than on “A”. This led to a much larger price move than before. After a second
correction, however, the momentum slowed. Move “C” was unable to mimic that initial
rally of the day, yielding only about 50% of the initial run.

When the stock turned around following this third upside move, the pace was similar
on the first drop, move “1”, as it was on move “C”. After falling into a small base in
the zone of the earlier congestion, the selling resumed. This time around, that pace
was very similar to the last one. So, the move labelled “2” held the equal move for the
first time.

Obviously, taking the time to go back and do the actual calculations for one move and
comparing it to the next can take a few minutes. When day-trading, there may not be
time to do that. So, instead of actually taking the highs and lows of a move and
manually calculating the difference, I tend to just eyeball them. Support and
resistance zones, after all, are just that: zones. Nailing them down to the tick or the
penny can actually cause a trader to hang on a little too long or not long enough by
imbuing them with a false sense of security. Sure, many times the moves are exactly
equal, but usually there is at least a tiny bit of difference. Combining the concept with
other forms of support or resistance even when the pace is the same will help.
 Part 4: Support & Resistance

Figure 27

On every chart I come across, no matter what type of security I am trading, I am

pretty much guaranteed to witness a wide variety of price support and resistance
levels at work. The chart of Abercrombie & Fitch Co. (ANF) in Figure 27 begins with a
trading range along $53.50 support and then a gap lower. The gap ran into price
resistance at $53 before selling off steadily until the 11:00 ET correction period.

The correction period corresponded precisely with the $50 whole number support and
the reversal took the stock into another whole number level at $51, which served as
resistance. It pushed slightly past the exact whole number, but congested right at it
before falling again into 12:30.

By basing along $53.50 earlier, ANF hinted at its preference for moving in 50¢
increments and once the stock pulled out of its extreme trend trading, it reverted to
that norm. The $50.50 level held nicely at 12:30 (“F”) and the stock based along that
level for about half an hour. When it broke lower on a continuation out of the 13:00
correction period it made it back into prior lows at $50 again (“G”). This was also the
equal move zone as compared to the drop from “B” to “F”. The pace of each of these
moves was nearly identical, lending itself to the equal move support holding perfectly.

The prior highs in the $51 zone held on the bounce off the second test of $50. This
second move back into that level was a bit more gradual than the first and hence the
whole number resistance had less “give” to it. It didn’t even have to hit the exact price
on the third test of the zone at “D”, but that was still the same resistance zone.

“H” at 15:00 was a combination of number support at $50.50, prior lows from 12:30,
and the congestion from “F”.

The more price support or resistance levels that hit at the same time, the stronger
that S/R level is going to be. So, when there is a prior low hitting at the same time as
 Part 4: Support & Resistance

whole number support is hitting or at the same time as an equal move level is hitting,
then it gives greater weight to that support level. The security is thus more likely to
hold that zone and form a stronger correction, either through a longer trading range or
an actual pivot and reversal off the support.

Indicator Support & Resistance Levels

So far I have been focusing purely on the types of price support and resistance. There
is an entirely different way to view support and resistance, however, and that is
through the use of indicators. These include such popular tools as moving averages,
Fibonacci lines, the MACD, Bollinger Bands, stochastics, and many more. Well, guess
what? That’s the most you’re going to hear me say about all but two of them. Now
why is that the case? Because nearly all types of indicators such as these are simply
based upon various configurations of price and various infusions of volume and
volatility. If you understand the underlying components, there is no need at all to
muddy the waters.

Time and time again I have seen traders flip from one indicator to the next, saying
“Toni, did you check out this??? It’s the Holy Grail! When your CCI is set like this and
your MACD is trending this way and hits the upper Bollinger Band right here like this,
see? Well that ALWAYS works.” And then it stops working and I never hear from them
again. In truth, whenever someone asks me about this indicator or that and the
strategy they use with it, it generally tends to go in one ear and right out the next. It
is not that most of the most popular of these do not work, but rather that it takes time
and patience to learn when they do not and when to ignore them in favor of just
reading the underlying price and volume movements. I realized with time that the
fewer things I had cluttering up my charts the better. I was more likely to avoid
second-guessing myself and make the correct decision, hesitating less often and hence
securing more favorable executions.

Despite these facts, there are still two indicators that I think are immensely beneficial,
particularly to the newer trader or investor, and these are moving averages and
Fibonacci lines. The first of these, moving averages, I still display on most of my
charts. In some respects, moving averages are now almost like a self-fulfilling
prophesy. They are so widely followed that as the most popular ones start to hit,
traders react… either by entering a trade or holding off on doing so. For me, this is
just another reason to pay attention. They may not be the Holy Grail, but they can still
be powerful good luck charms.

Moving Averages as Support an d/or Resistance

A moving average is a technical indicator that is used to show the average value of a
security’s price over a set period of time. There are several types of moving averages,
but the two that are the most popular are simple moving averages and exponential
moving averages.

A simple moving average (sma), sometimes called an arithmetic moving average, is

calculated by adding the closing price of the security for a number of time periods and
 Part 4: Support & Resistance

then dividing this total by the number of time periods. So if I am looking at a 20 day
simple moving average, then it represents the total of the closing prices of the last 20
days divided by 20. The “moving” part of “moving average” is due to it being
calculated over and over again, updating automatically on a continual basis.

The other popular type of moving average is the exponential moving average (ema). It
is calculated by applying a percentage of the current bar’s closing price to the previous
bar’s moving average value, giving greater weight to the more recent data.

Since there is wider range of possible pricing methods various charting platforms can
assign to create a moving average, the zone of the support or resistance at a moving
average level should be treated with a bit more leeway. As in trend channel or trend
line support or resistance, it’s advantageous to combine this type of support or
resistance with another to give it more weight.

I personally use simple moving averages. This is not to say that they are any better or
any worse than exponential moving averages, but it’s what I started with and I never
felt a compelling reason to switch. The most common moving averages to use, and
hence my favorite, are the 10, 20, 50, 100 and 200 period moving averages. I use
each of these on my daily, weekly and monthly charts.

Sometimes a 40 day sma can be substituted for or used in conjunction with a 50 day
sma. Some securities will just tend to hold one of these better than the other. If I run
into a stock, for instance, that just never seems to quite hit that 50 day sma as it
moves higher in an uptrend channel, then I’ll often try pulling up the 40 day instead.
With time, however, one can get a feel for about where each of these will fall and it’s
not necessary to physically flip back and forth when one moving average holds better
than the other.

On my intraday charts I primarily utilize a 20 and 200 period simple moving average.
Although the 50 and 100 sma also work, I have found that it doesn’t give me that
much of an advantage as compared to the other two and just adds more clutter. This
is just a personal choice, however, and many traders who use the same methodology I
do will still display them. The 10 period sma also works intraday, but I limit its use to
the extreme momentum trends. Otherwise it just acts as noise.

Showing pictures littered with moving averages would just get a bit redundant, so to
keep things simple and straight to the point, I have selected two charts displaying
typical reactions to moving average levels. The first, a daily chart of Nutri System Inc.
(NTRI) in Figure 28 demonstrates the use of a 20, 50 and 100 day simple moving
average, while the next chart of the ES (S&P 500 EMini) in Figure 29 utilizes the 20
and 200 sma intraday.

One of the key characteristics for moving averages on the daily time frame to pay
attention to is the fact that the first time a security moves into a moving average after
backing away from it for several weeks, then the more likely it is to hold the moving
average that day. This is true of each of the moving averages circled on NTRI.
 Part 4: Support & Resistance

Figure 28

The first moving average I want to examine is the one labelled “A”. This is the 20
period simple moving average. NTRI had been trading under it ever since the gap
which trapped the bulls back in the middle of July. This is the first time it was testing
that moving average again after that descent. The stock gapped up that day after
several days of buying and even though it didn’t hit that moving average right away at
the open, it didn’t have much room to move before it did so.

The significance of this is that when I am looking at morning gaps for intraday setups,
particularly in the direction of the gap, let’s say a buy setup on the day in question,
then I am more likely to scalp the stock or pass on it altogether. The odds of it
breaking right through it like it did when it hit the 100 day sma on the bull trap, are
remarkably slim compared to the odds of it holding like it did at “A”.

Not only do I use more caution when a security is gapping into a moving average zone
for the first time, but also when it’s running or falling into it after a several day move.
This is what happened at “B” when NTRI returned to its 100 day sma. The stock had
just broken free of its trading range in the $50 price zone (which was one reason it
was able to bust the 50 day sma easily), and was pulling into the next significant price
resistance zone of $60. The exhaustion from the daily run, combined with the whole
number resistance, culminated with another near-perfect hold of moving average
resistance at that 100 day sma. Even though it did trade above that level in the
following two sessions, the pace of the buying was dramatically subdued and the stock
was essentially falling into a congestion along that moving average resistance, which
became more apparent in the days that followed.
 Part 4: Support & Resistance

The third moving average zone I’ve circled is at “C”. This is actually a combination of
both 20 and 100 day sma support and is the third type of moving average support to
keep an eye on. As with other types of support or resistance, the more that hits at
approximately the same time, the stronger that level will tend to be.

Some trading strategies actually make use of moving average crossovers for timing
entries or exits. I use them to some degree as a confirmation tool on some of the
reversal strategies I favor. For instance, if I am looking to short a stock that has
reversed off highs and is basing along a 20 period sma, then I know that my position
has a much higher chance for success when the 10 period sma closes in on that 20
period sma. The closer the two are to converging by the time I get a short trigger, the
better. If the two converge and I still don’t have a short trigger, then it tends to
indicate that my risk is increasing and I may want to rethink my bias.

A fourth example of a reaction to a moving average takes place at “D”. This should
trigger some flashbacks to extreme momentum moves in relation to support or
resistance. This was another news-driven day of trading and the stock plunged from
multi-month highs to engulf not only the prior day’s trading, but two weeks worth of
trading. This initially flushed the stock right through its 20 day sma, but upon looking
more closely, the stock still closed the day very near to the price of the 20 day sma
and the following session was transected right through the middle by the moving
average. This confirms the rebound as being, at least in part, a response to that same
moving average zone, despite its initial appearance of nonchalance.

Although it was passed over the first time around, the 50 day sma did gets its chance
to show its worth in late October and early November. After clearing the 20 day sma,
NTRI continued on to this next level of support. It had the added benefit of hitting at
the same price zone as “B” and “C”, giving it some added assistance. The stock
hugged this support level for several weeks with prices moving higher to keep pace
with the gradual incline of the moving average.
 Part 4: Support & Resistance

Figure 29

Intraday the moving averages work in much the same way as they do on the daily
charts and larger time frames. If prices have been on the move for awhile before the
moving average hits, then the more likely it is to hold that level well. The faster
moving averages hit more often than the slower ones, which is abundantly clear on
the 5 minute chart of the ES (Figure 29) displaying the 20 and 200 period simple
moving averages. Even though the 20 period sma is not always followed by a reversal
when it hits, it nevertheless displays some reaction or another to that support or
resistance zone each and every time, starting the pivot off highs at “B”, to the stall in
the buying at “C”, leading to congestion and a continuation into the 200 period sma at
“D”. This second test of the 200 sma holds more firmly than it did as support and the
prices turn over again. The 20 sma merely slows the selling at “E”, but holds as strong
resistance at “F”.

As in the larger intraday reversal into the 20 sma at “E” off morning highs, the test of
that same sma on the reversal off lows at “G” does not hold, thanks in part to the
increased momentum into it. It congested along that resistance zone, clearing it
shortly after 14:30 ET before pulling back into it as support at 15:30, marked “I”. The
final sma level hit is the 200 sma, once again serving as resistance at “J” just prior to
the close.

One of the advantages to using moving averages is that they move in the same
direction as a price move, or trend. They can work well to help a trader let profits run,
utilizing breaks in moving averages as support in an uptrend to help curb losses. In
this regard, however, I would recommend combining it with another support level so
as to not get flushed out by misjudging the “zone” of the moving average itself and
 Part 4: Support & Resistance

placing a stop or trailing stop too close at hand. A trailing stop is one that tightens as
profits emerge, helping to protect those gains, but still leaving room for further profits.

On the other hand, the fact that they do follow a price move or trend is also a
significant disadvantage because the faster moving averages, such as the 10, 20 or 50
period sma, do not work as well in a choppier trading environment and other forms of
support and resistance become more appropriate to focus upon. This is when many
traders may turn to support or resistance based upon oscillators, such as the
Commodity Channel Index (CCI) or the Relative Strength Index (RSI), which is quite
popular. The Stochastic oscillator is favored by many in more of a range-bound or
choppy market. I occasionally us the Commodity Channel Index (CCI) on a daily time
frame as just another confirmation tool of overbought or oversold conditions, but
rarely give it much more than a cursory glance and don’t utilize it at all on any other
time frame. Many of my colleagues, however, have had great success with these tools,
so they are worth mentioning even though they are beyond the scope of this particular
course.

Fibonacci Levels as Support & Resistance

Another great indicator for traders, particularly those who are new to trading or who
focus on trading the indices in one form or another, uses a mathematical series known
today as the Fibonacci Series. I would wager that most people had never even heard
of such a thing until a little book by Dan Brown titled The Da Vinci Code hit the shelves
and the concept of Fibonacci Series spread like wildfire.

The Fibonacci Series was identified by an Italian name Leonardo Pisano. He was known
for most of his life as Fibonacci, which was a contraction of “Son-of-Bonacio”.
Obviously Bonacio was his father’s name. Now here you are beginning to wonder just
where in the world am I going with all of this nonsense and how can some Italian who
lived 800 years ago help me with my trading?

Well, Fibonacci also wrote a book and his book was instrumental in bringing the
foundation of mathematics as we know it to the West, most notably the Hindu-Arabic
numbering system, which eventually made the Greek and Roman alphabetic systems
all but obsolete. The book, Liber Abaci, gained vast appeal because it was filled with
practical applications to this new system.

Yeah, yeah… This still doesn’t explain how this applies to trading. Right? Well, putting
aside the implications this “new” numbering system had on our ability to access risk, it
was in another section of this book that Fibonacci introduced the series of numbers
that now carry his name and it is that series of numbers that leads to a second,
extremely popular indicator that carries mass appeal to a wide spectrum of traders
and investors, including myself.

The Fibonacci Series is a series of numbers in which each number is the sum of the
preceding two numbers.

For example:
1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, etc…
 Part 4: Support & Resistance

In other words…
1+2=3
2+3=5
3+5=8

and so on and so forth…

In and of themselves they seem rather innocuous. There are specific characteristics of
the Fibonacci Series, however, that have caught folks’ attention in many professions,
including the financial markets.

For one thing, taking any pair of numbers after 89 which are adjacent to each other in
the series, such as 377 and 610, and then divide the first by the second, the answer
will be 0.618.

Dividing any number by its preceding number, after 144 the answer is always 1.618.

Additionally, skipping one number and then divide, such as 8 by 21, the result is 0.38.

These characteristic alone, while somewhat intriguing, still shed little light on why they
are of interest to us as traders. What does peak one’s curiosity and admiration is the
fact that the Fibonacci Series and the ratios derived from it, occur throughout the
natural universe.

The ratio leading to 1.618 was known by the Greeks as “The Golden Mean”. It defines
the proportions of not only the Parthenon, but also the U.N.’s General Assembly
Building in New York. The length of the average human body from above the navel
compared to below it holds true to this ratio, as does the length of each successive
bone in our fingers. Leonardo da Vinci was introduced to this ratio through a friend
who encouraged him to utilize it to master the concepts that he had been using
intuitively up to that point, hence the connection between Fibonacci and Brown’s Da
Vinci Code.

What is of particular interest is the fact that the ratios derived from the Fibonacci
Series also serve as rather remarkable levels of support and resistance and can be
used with great proficiency when trading securities, particularly when trading the
indices.

The Fibonacci ratios have been translated into percentages representing the amount a
security has retraced its prior price move in terms of the Fibonacci levels. The
following Fibonacci levels are the ones most commonly used in technical analysis:

138.2%
100.0%
61.8%
50.0%
38.2%
0.0%
- 38.2%
 Part 4: Support & Resistance

Fibonacci levels are nearly as reliable as moving averages for support and resistance
levels. The first thing for a trader to do when choosing to use them is to identify the
time frame that they wish to focus on. In the past, I have used Fibonacci levels most
proficiently when day-trading the EMini futures contracts for the major indices. The
chart labelled Figure 30 is an example of Fibonacci levels on a three minute chart of
the mini-sized Dow Jones Industrial Average, which goes by the symbol YM.

A trader then needs to pick out a price move that they wish to use against the current
trading activity. In this example the morning is winding to a close. Let’s conclude that
I wish to use the morning rally as my primary price move, anticipating a correction of
one sort or another into the afternoon. The first thing I will need to accomplish is
actually adding the Fibonacci lines to my chart.

Most charting platforms will have the Fibonacci tool available with the ones listed
above set as the default. I use Real Tick for my own charting and to add the levels to
my chart I must make sure that Fibonacci is selected in my tool box and then point my
cursor at my starting point, holding down the left-click button on my mouse as if I
were highlighting a passage of text, and then moving to the end point on a price move
before lifting my finger. These are the 0% and 100% Fibonacci retracement levels.
The platform then fills in the others automatically.

Figure 30

In selecting the beginning and ending points, use the absolute lows and absolute highs
of a price move. In an uptrend, begin at the lows, such as shown at “A” on the YM
chart in Figure 30, and end at the highs of the move, shown here at “B”. A return to
the starting point would thus represent a 100% retracement of the price move.
 Part 4: Support & Resistance

A trader can start drawing Fibonacci lines even if s/he is not certain that the absolute
highs of a price move are established. For instance, at 11:30 the YM was still holding
fairly close to the highs of the day and there was still a chance for them to break at
some point, but once it had held those highs for about 30 minutes, the Fibonacci lines
could have still been drawn in order to assist with identifying pullback support as well
as the next potential resistance, which, in terms of the Fibonacci lines, would have
been at the -38.2% level. Since those highs did hold, however, that level is not
displayed in this example. The support on the pullback to the 38.2% retracement level
though is. When the YM fell off the morning highs, that Fib level, marked as “1”, held
extremely well, missing it by only a tick or so before pulling back into the highs.

The YM tested the highs several times throughout the early afternoon, marked as “2”,
“3”, and “4”. The pace never slowed enough on each of the corrections though to allow
for enough of a build-up of momentum to push through the highs and the range
eventually broke down.

Incidentally, the trading range would have had a better chance to have broken those
mid-day highs if it had pulled back just a little more after the test of highs marked as
#3. This would have pushed the YM into a slightly longer range before the next test of
highs. Although not always the case, a strong trading range, ideal for a continuation
breakout, will take 1.5 to 2 times as long to form under normal market conditions as
the rally heading into that range. Since the morning rally took about two hours to
form, this means that the range would have had stronger odds for a successful upside
breakout if it held for at least three hours.

Instead, the range fell apart, again dropping back to the 38.2% Fibonacci retracement
at #5. This time it did not hold it, however, and only corrected for about 5 minutes
before plunging through that Fibonacci support. The next two Fibonacci levels are the
50% and 61.8% Fibonacci retracements. There was little reaction to the 50% level,
but the 61.8% one held at #6 and the YM then fell into a smaller trading range stuck
in between the 61.8% and 50% levels.

When this smaller range broke lower, the momentum was slightly stronger than the
initial selling. Support hit first in the equal move zone as compared to that first decline
out of #4, again ignoring a Fibonacci level at the 100% retracement, but the selling
continued into another Fibonacci level marked as #8. This is the 138.2% retracement
off highs. It held very nicely and the YM bounced back to the Fibonacci level it had
ignored earlier at the 100% zone, much as it had when it was dealing with the 50%
zone. The 100% level at #9 then took the market back into the 138.2% zone prior to
the close, making it also a price support level as well in that it was also a test of prior
lows.

Over time, I stopped physically adding the Fibonacci lines to my own charts other than
using them for demonstration purposes, because I learned to have an intuitive feel
based upon experience as to where each of the levels would fall. This keeps my charts
less cluttered, but even just adding them in a light gray hue can help improve a
trader’s analysis of the price action without them being a huge distraction.

There are other more advanced configurations using Fibonacci, but as with most things
when it comes to trading, the least complicated the better. To borrow an apt quote
from Peter Bernstein, “We have trouble recognizing how much information is enough
and how much is too much.” As discussed earlier, this is the situation many traders
 Part 4: Support & Resistance

find themselves in when delving into the field of technical analysis, so this is word of
caution that is well-worth repeating. Even though technical indicators based upon
some mathematical formula or another can be useful in assisting traders in their
investment decisions, it is wise to stick to only a few and to not switch back and forth
a lot, instead taking the time to build your experience level. It is also wise to not rely
on just one or two of these types of indicators when developing a trading or
investment strategy, but rather to take into account each of the simple 5 technical
tools laid out in this course which cover a wider view of the security in question to
assist with those decisions.

Interestingly, Fibonacci analysis can also be applied to moving averages. Some traders
will use a 13 or 21 period moving average for instance.

Combining Support and Resistance

I’ve covered quite a few methods for recognizing support and resistance levels in this
segment, so I will now take a minute to look at how these can come together. For this
purpose I’ve selected an intraday chart of China Med Technologies (CMED), displayed
in Figure 31. This 5 minute chart has a goodly mixture of both price and moving
average support and resistance levels to display their import.

To begin with, what I like to do when first looking at a chart is to get a grasp on the
price increments in which a stock tends to move. In the case of CMED, many of its
intraday price moves are about a dollar at a time, but it stalls at both whole and half
numbers most often. The two most obvious instances of whole number support and
resistance are at $30.00 and $33.00. $30.00 served as support on day one heading
into the last hour of trading. The highs at the $33 zone were made just prior to 13:00
ET on day two when it ran out of 11:00 and then fell flat for almost two hours. These
marked significant correction points for the stock. Some nice examples of it stalling at
the halves as well are demonstrated on this chart when it reacted on both days to the
$32.50 zone. It held that level as highs on day one and then again as the highs of the
morning on day two. It also served as the congestion zone for the pullback from $33
on day two.
 Part 4: Support & Resistance

Figure 31

While the example of $32.50 is also one of prior highs serving as resistance and then
support, the same type of resistance also takes place just above $31 from a small
afternoon high on day one to the opening highs on day two.

CMED also has a nice example of equal move support on day one. After dropping off
the morning highs, it fell into a range over noon. When that range broke lower, the
pace picked up a bit, but the equal move zone still held very well and helped the
market bounce back a bit into the early afternoon.

In addition to the price support and resistance, CMED made good use of the 20 period
simple moving average as well. After the early morning pop on day one, CMED based
along $31.50 for an hour or so until it caught up with the 5 minute 20 sma. It held the
highs of the range and pushed lower into the early afternoon, leading to that
continuation move we just looked at.

The 20 sma continued to hold throughout the remainder of the day, but notice that
within the last hour or two it began to test it repeatedly. This is often a sign that it will
eventually bust through it, like it did into the next morning. Once it did so, that 20
sma resistance then became support, holding the lows of the early morning correction
for the first hour before the stock popped off that support into the 11:00 ET correction
period. The slowdown of the selling into the prior day’s lows, combined with the
momentum increase that morning, created a rounded low with the move into the 20
period sma the next morning leading to the completion of a pattern that is most
commonly known as a “Cup with Handle”. It is one of my favorite bottoming patterns,
although it can also be part of a larger price move, with the entire pattern serving as a
continuation setup on a larger time frame. That 20 sma again held well as the stock
based throughout the remainder of the morning, igniting another breakout higher
around 12:30 ET and, as in the prior session, remained a support level into the close.
 Part 4: Support & Resistance

The CMED chart illustrates how a security can hang onto a support or resistance level
for a bit, testing it repeatedly before busting through it. This testing and retesting is a
good heads-up to watch for a break of that S/R level. The strategy works the best,
however, when it’s part of a newer overall price move. For instance, in CMED the stock
hugged a resistance level after several waves of selling, so the resistance that broke
led to a larger change in direction and the beginning of a new upside move.

Figure 32

Busting Support and/or Resistance Le vels

In the chart of Timken Co. (TKR) in Figure 32, several examples of this type of price
activity are emphasized. The first is when the stock hugged the 5 minute 20 sma
around 14:30 ET before breaking lower, in a very small example. That breakdown took
the stock into its 5 minute 200 sma support where it based for an even longer
correction along that support zone. The 20 sma served as an upside barrier, and the
prices became wedged between the support and resistance, favoring the support
before breaking through it just before the end of the day and continuing in the next.
The third time this type of activity occurs is after the stock corrects off its morning
lows. It broke through the 5 minute 20 sma this time, but is unable to clear it
completely throughout the entire afternoon. After about 13:45 ET it couldn’t even
seem to shake it for even a single bar on the 5 minute chart. A half-hearted attempt
at the 15:00 ET correction period just led to a pull right back to the support.

This picture reminds me a bit of when I see a dog tied up in someone’s back yard and
it’s trying and trying the limits of its chain, excited about one thing or another… a
squirrel on the neighbor’s windowpane or something… Eventually it just wears itself
out, however, and returns the doghouse. That’s what happened on TKR as the day
wound to a close on Sept. 22nd. The buyers finally gave up, slinking back to the dog
house and dropping the stock to new lows into the following morning.
 Part 4: Support & Resistance

Figure 33

In terms of how often a support or resistance level is likely to hit before it does bust it,
the third time is often the charm. Sometimes it can break it after bouncing off it two
other times. That was what happened with the NQ in Figure 33. It paused at the third
test of the lower trend channel for only a couple of minutes before the support gave
way.

Figure 34

At other times, however, it might hug that support even longer, or even pull up very
slowly for a bit to change the pace within the range a little more favorably before it
gives way. This is the type of action I prefer, because it allows me to place a tighter
stop over that slower moving segment as opposed to a prior pivot high within the
range and the follow-through is typically steadier without as much risk of the security
 Part 4: Support & Resistance

pulling back into the former support before continuing lower. That type of retracement
is what happened on the NQ from about 13:30 to just after 14:00.

Occasionally it can take a bit longer for a support or resistance level to break. This is
particularly true if the initial move into that s/r level was stronger than average. That
occurred on the monthly chart of CECO in Figure 34. I began stalking CECO for a
short setup as a position trade towards the end of 2005. It hit the lower trend channel
early in 2006, but it held. The sellers finally returned in the summer of 2006, leading
to a nice breakdown as the year progressed.

This is a case where, given that the selling in 2004 was at the extreme of above
average pace, the continuation on another breakdown won’t have a chance to
maintain the same type of momentum, so price targets have to be tightened and the
equal move type of support simple will not work as well. Obviously that isn’t even
possible here since an equal move would push the stock below zero, but the concept
remains the same even when there is theoretically enough room.

Combining Price and Indicator Support &

Resistance
When examining the odds of a support or resistance level holding or not, I check to
see if there are several types of support or resistance hitting at about the same time.
When that’s the case, those levels have more strength and have a more difficult time
breaking.

Figure 35
 Part 4: Support & Resistance

This 5 minute chart of Research in Motion Ltd. (RIMM) in Figure 35, from the first of
December, provides a perfect example. The stock had sold off all morning, finally
rounding off at lows into the early afternoon. That correction continued until after
15:00 ET. With only about half an hour left in the day, RIMM ran head-long into a
number of resistance levels all at once. Whole number resistance loomed overhead at
$136.00, it was nearly the equal move resistance from the continuation off the 5
minute 20 sma breakout, the 200 sma was hitting right in the middle of the
congestion zone from earlier in the morning, and it was right at the 38.2% Fibonacci
retracement level off the earlier lows. The bulls intraday never had a chance. At first
RIMM corrected through time, basing into the close, but that quickly changed
overnight as the stock gapped lower, hitting the 5 minute 20 sma before retesting the
prior day’s lows.

Combining Time Frames for Support & Resistance

Support or resistance levels that hit at approximately the same time, but on multiple
time frames in a stock or commodity also hold more easily than if they are only hitting
on one time frame.

This means that if there is a support zone on a daily chart as well as a 15 minute
chart, such as in Energy Transfer Partners (EPT) in Figure 36, then that support is
more likely to hold than if there was only support on the 15 minute time frame. In EPT
there were several nice factors that helped it hold the opening lows on May 15 th. First
off, there was the $42.50 price support. This was combined intraday with the 200
period sma on that 15 minute chart. The daily support, being on the larger time frame,
was even more significant. The opening lows hit the 10 day sma right away. This was
after gapping off the previous day’s close at the 20 day sma support. The stock was
able to pull solidly back up into the middle of the range from the week before as a
result, without even looking back to second-guess the buyers.
 Part 4: Support & Resistance

Figure 36

Conclusion
Once a trader has a firm understanding of the types of price activity that is likely to
create support or resistance in a security, the next step is to put this knowledge into
practice. A trader cannot simply look at a support level, such as $50, and assume that
a stock will bounce off it. It is imperative to take into account the interaction of the
support or resistance with the other 4 tech tools.

While I have not yet covered the topic of trend development, each of the four
segments I have covered thus far will play a role in the impact support or resistance
has on a price move. A slower than average paced move into support as compared to
the rally which precedes it, for instance, will have a better chance of bouncing strongly
off the support. The odds increase if the volume is also declining into that support. The
pattern improves even more if the support zone hits at the same time as a correction
period. Even without considering the trend development, the interaction of these four
tech tools alone creates a highly probably buy setup with significant reward versus risk
potential.

Worksheet Questions
Answer the following questions to the best of your abilities. Once you have completed
this section, turn to the answer guide to double check your work.

1) Which support level is likely to have the strongest support zone?

 Part 4: Support & Resistance

a) a five minute 20 simple moving average

b) a 50 week simple moving average
c) the third test of lows on the weekly chart
d) a second test of lows on a 60 minute chart
e) a retracement to a 120 minute congestion zone

2) Which test of support or resistance is the one that is most likely to break?

a) the first test

b) the second test
c) the third test

3) Which of the following is not a Fibonacci support or resistance level?

a) 61.8%
b) 0.0%
c) 138.2%
d) 35.8%
e) 100%

4) Complete the following sentences:

a) When a support level breaks, it becomes

____________________________.
b) When a resistance level breaks, it becomes
__________________________.
c) A ___________________ is the minimum upward or downward movement
in the price of a security.
d) $150 is a type of ________________________________
support/resistance.
e) A ________________ is a break between prices, either higher or lower,
whereby no trading occurred between the two price levels.
f) In the Fibonacci Series, when any number after 144 is divided by its
preceding number, it yields 1.618. This was known by the Greeks as
“_________________________________________.”

5) Explain the concept of a “support zone” as compared to the absolute price

of a support or resistance point.

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

6) How does the pace of a move of a security into support or resistance affect
the reaction it has to that support or resistance level?

___________________________________________________________________
 Part 4: Support & Resistance

___________________________________________________________________

___________________________________________________________________

7) How does a security typically react when it has broken out of a trading
range and then returns to that area of congestion?

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

8) What is a trend line and how is it drawn?

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

9) What is the difference between a simple moving average and an

exponential moving average?

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

10) What does a 20 period simple moving average measure on a daily chart?

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

11) List the main types of price and indicator support and resistance
discussed in this portion of the course.

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________
 Part 4: Support & Resistance

Worksheet Answers
1) Which support level is likely to have the strongest support zone?

a. a five minute 20 simple moving average

b. a 50 week simple moving average
c. the third test of lows on the weekly chart
d. a second test of lows on a 60 minute chart
e. a retracement to a 120 minute congestion zone

2) Which test of support or resistance is the one that is most likely to break?

a. the first test

b. the second test
c. the third test

3) Which of the following is not a Fibonacci support or resistance level?

a. 61.8%
b. 0.0%
c. 138.2%
d. 35.8%
e. 100%

4) Complete the following sentences:

a) When a support level breaks, it becomes resistance.

b) When a resistance level breaks, it becomes support.
c) A tick is the minimum upward or downward movement in the price of a
security.
d) $150 is a type of whole number price support/resistance.
e) A gap is a break between prices, either higher or lower, whereby no trading
occurred between the two price levels.
f) In the Fibonacci Series, when any number after 144 is divided by its preceding
number, it yields 1.618. This was known by the Greeks as “The Golden Mean.”

5) Explain the concept of a “support zone” as compared to the absolute price

of a support or resistance point.

An absolute support or resistance level is often an exact price. For instance,

a prior high might be $50.07 in a stock, or a 20 period simple moving
average may have a value of 12253 on the YM. When a security comes into
support or resistance, however, it may not hit it exactly. So, instead of being
focused on an exact price level, a trader should consider the support or
resistance to be a zone which cushions the exact price. So, the resistance
zone of the stock with a prior high of $50.07 may span from $49.90 to
$50.20. The moving average support zone on the YM, which would hit at
12253 could, also be considered to be trading at the support zone when it is
between approximately 12256 and even down to 12246.
 Part 4: Support & Resistance

6) How does the pace of a move of a security into support or resistance affect
the reaction it has to that support or resistance level?

The faster a security moves into a support or resistance level, the more
“give” it has at that level and the more it can push through the exact price of
the support or resistance before bouncing back and holding it. Hence, the
support or resistance “zone” becomes larger. A slower paced move into
support or resistance, however, is more likely to hold the exact price of the
support or resistance within a few ticks. It might not even hit it absolutely,
but begin to correct off the zone even before the exact price, such as the
price of a 20 period simple moving average, hits.

7) How does a security typically react when it has broken out of a trading
range and then returns to that area of congestion?

The congestion level becomes a support or resistance zone once it has

broken and then is tested again. For instance, if the Euro breaks higher out
of a trading range, and then pulls back into that trading range, that range
becomes a support zone. Typically the middle of the range is the strongest
price support.

8) What is a trend line and how is it drawn?

A trend line is a line that indicates the direction of a larger price move. In an
uptrend it connects the lows of an upside move and serves as support when
it is tested and resistance once it is broken. When drawing a trend line, the
conventional method is to connect the lower prices for an uptrend and the
higher prices for a downtrend. Sometimes traders will ignore odd ticks and
tails in a price move.

9) What is the difference between a simple moving average and an

exponential moving average?

A simple moving average is calculated by adding the closing price of the

security for a number of time periods (such as daily bars) and then dividing
this by the number of time periods (such as 20). Exponential moving
averages will give greater weight to the more recent data.

10) What does a 20 period simple moving average measure on a daily chart?

It measures the average closing price for the past 20 days.

11) List the main types of price and indicator support and resistance
discussed in this portion of the course.

Whole Numbers, Prior Highs and Lows, Prior Congestion Zones, Gap Zones, Trend
Channels and Trend Lines, Equal and Measured Moves, Moving Averages, and
Fibonacci Retracement Levels.