Support and Resistance - The Most Important Chart Patterns

Question 1

Support and resistance what to look for

Answer 1

• Locations where price stalls
• Encompasses a price range
• Support zone = overwhelming buying demand stops a decline
• Resistance zone = overwhelming selling pressure stops a rise
• Areas of demand and supply of a stock

Question 2

Chart Pattern SAR

Answer 2

• Chart pattern like double top highlight support or resistance zones - places where price often pauses or reverses
• Underlying support changes into overhead resistance as one’s trader’s floor becomes another trader’s celling - support becomes resistance becomes support depending on which side price approaches
• Broadening bottom show support (bottom trendline) or resistance (top trendline) as price moves to touch the lines and then rebounds like children in a water-balloon throwing contest - after each toss, they step back and prices takes longer to cross the pattern but eventually price starts to break out of the pattern
• Symmetrical triangle = two trendlines narrow over time and join at the triangle apex, showing where you can expect support and resistance in the future

Question 3

Fibonacci Retracements

Answer 3

• Price climbs up a wall of worry in steps review page 38

Question 4

Using Retracement Percentage

Answer 4

• Look for straight line runs - up or down
• The retracement percentages don’t always work but they give you an indication of where price is likely to pause or reverse
• Longer term trend = place a few cents below the 62% value in an uptrend (protects trades 6% of the time in research)
• If that hits the stop loss order, changes are the price is going to continue lower
• Half staff patterns - flags because they appear midway through a steep rise or decline
• Price often retraces 38%, 50% or 62% of the prior move either up or down

Question 5

Peaks and Valleys

Answer 5

• Example of valley E and peak B connecting (page 38) horizontally
  The bottom of the symmetrical triangle stops at the level shown by the peak to the right of D
• On most charts, you will see that price stops of pauses at prior peaks and valleys
• If you see a peak or valley form on above average volume, then watch for price to reverse at those locations in the future. The reverse may be temporary but it’s a good guess that the trend will struggle here
• Price stopped at a hilltop or valley after a breakout from a chart pattern
• 26-27% of the time, price stopped near overhead resistance underlying support set up by a prior peak or valley
• Measuring peaks and valleys show you the effects of future support and resistance (unless of where a breakout is)

Question 6

Horizontal Consolidation Regions are

Answer 6

• known an knots of price congestion where a stock flattens
• Appears as prices with flat tops, flat bottoms or both
• Examples of HCR on page 41

Question 7

Round Number SAR

Answer 7

• Round numbers are not the greatest for holding stop losing and trades 10,20,30 but stalls within 15,25,35
• Price shows support and resistance at round numbers, numbers that end in zero
• To avoid stop running, place stops at odd numbers - those not ending in zero
• Numbers that end in double zero ($1.00, $20.00, etc) are useful as price targets for day traders

Question 8

Trendlines and Channels

Answer 8

• Drawing trendlines- one connecting peaks and another along the valleys sometimes results to parallel lines we call channels
• The walls of those channels are where price finds support and resistance
• Review page 45
• Determines where price is likely to turn for the future
• Trade tall channels by buying near the bottom of an upsloping channel and selling near the top or the reverse, short = sell near top and buy near bottom

Question 9

SAR and volume

Answer 9

• Peaks formed with high volume stop price more often than do peaks formed with below average volume
• Valleys formed with high volume stop price more often than do valleys formed with below average volume

Question 10

Using SAR to Trade

Answer 10

• Review page 47 chart
• Partial rise accurately predicts an immediate downtrend breakout 74% (bull market)
• Peaks formed with high volume stop price more often than do peaks formed with below average volume
• Valleys formed with high volume stop price more often than do valley formed with below average volume