Utilizing Support and Resistance
Levels - Part 1
Applying basic price levels to
identify support and resistance levels.
OK gang... let's let going... First
of all... thanks for coming! This is the first of a 4-part lecture
series on support and resistance. For those of you who have
purchased my CD series, the material in this series is going to be a
bit of refresher. It will cover some of the main points in the
S/R segment of that course, but I have completely new charts, etc., so
it will help possibly clarify some of the points as well. I will take
questions following the class, so please hold off until then since
often I find that many of the questions people have mid-way end up
answered by the time I am done anyway. :)
Simply put, support and resistance
levels are places in the market when the current trend or price move
that is in play in the market will either turn or stall. The traits of
support and resistance levels apply to all type of
markets and time frames, so the concepts in this class will figure into
any market you trade.
Now, when thinking of support and
resistance levels, it is very common for most people to think of them
in terms of absolute price levels. For instance, if they are looking at
$50 as a resistance levels, they mean exactly $50. On the other hand,
if they are looking at moving averages as a support level, they will
check to see what the exact price of the moving average is, such as
In reality, support and resistance
levels are not exact prices, but rather price zones. So, if the
resistance level is $50, then it is actually the zone around that $50
level that is the resistance. The stock may hit only $49.87 or it may
hit $50.25 and still hold the $50 as price resistance.
The main factor in determining
exactly how much the exact prices are tested by is how quickly or
slowly the prices move into that resistance zone. For instance,
if the zone hits very quickly on a large momentum surge, then it is
more likely to hit that $50.25 level. This is also the case if the
stock is a rather volatile one with a wide price range intraday.
If the security spikes higher and does not quite hit the price
resistance, such as a spike into $49.70, then it may round off into $50
with slightly higher highs and never exactly touch the $50 price
resistance zone before turning over due to the slowdown in momentum
into that resistance. The larger the time frame, the greater the
price zone is as well. A
resistance zone at $50 on a weekly time frame may have a range of $1 on
each side of $50. Where traders tend to run into trouble is in thinking
that because the stock has traded over $50 by more than just 10 cents
that the $50 has broken, so we often hear of people "buying the highs"
or "shorting the lows" in the case of support.
For today's session I am going to
focus on 4 main types of price support and resistance. They are WHOLE
NUMBER SUPPORT AND RESISTANCE, PRICE PIVOTS, PRICE CONGESTION ZONES,
and EQUAL OR MEASURED MOVES. I will begin with the whole number
Whole number support and resistance
refers to the price levels most of us have in our head when we think of
support and resistance right away. They are levels like the 14,000 that
we have heard so much talk of in recent months. CNBC does not get
excited by the Dow hitting 13,984. We do not hear about oil in
terms of the cents per barrel, but rather it's proximity to breaking
the whole number level. When a security, or the market overall moves
into these larger price levels, rounded to either the dollar in most
stocks, or the 10s, 100, etc. people tend to react most often at those
levels. It's second nature. My third grader has just spent her first
semester in school learning how to average and to round up or down.
That is then taken with us throughout our lives.
FIGURE 1 - $DJI Daily
For futures traders a common level we
will notice in the NQ is how that tends to gravitate to moves of 5
points at a time and stall at or about the 5 point increments. In
the YM the 10 point increments, and particularly the 100 point levels
catch people's attention and reversals or consolidations tend to form
at those zones. In the chart of the Dow Jones Ind. Average
(Figure 1) we can see how it often moves towards those 100 point
increments as well. The 12,000 and 14,000 level are the most pronounced
in this case, but many of the places it stalls at are almost exactly at
a 100 point price level.
Even though at "D" the Dow
technically broke 14,000 in terms of the exact price (yet held the
14,200 securely) when we think of the Dow in terms of a larger time
frame move, we have yet to see the 14,000 zone penetrated. At 14,200,
the Dow was STILL AT the 14,000 price resistance zone. What I am
looking for at this point is a third test of that zone, maybe even a
slightly higher high and then a larger correction where we can see a
stronger reaction to this price resistance zone on a larger time frame.
FIGURE 2 - JBLU Daily
Here is another example of price
support and resistance (Figure 2). This time it is in a rather
cheaply-priced stock that I'm sure you've all heard of... JBLU (JetBlue
Airways). At times, the support or resistance zones will appear to
break, pushing through the s/r level only to swing back and hug that
level. This was the case in March and early April in JBLU. JBLU had
fallen into $12 on rapid momentum, pushing it somewhat under the exact
price support of $12. It then hugged that level for over a month before
giving way to another round of selling into the $10 support zone.
Once again the momentum was strong, so it traded slightly under that
exact price before pulling highs. When it tested it the second time
around, however, in the middle of June, it held that price more
precisely since the momentum at that point was not as steep. This
second test of $10 was then followed by a retracement back into the $12
level. Once a support zone breaks, such as the $12 level in JBLU,
that zone then becomes resistance on a reversal.
FIGURE 3 - PDLI Daily
Here is another example that you can
look at which shows similar types of price activity (Figure 3). Notice
that the rapid move into November with one bar of selling pushed
through the $18 exact price level that first day it it, however, it
then sprung back and coiled along that price support zone. Many times
this would present itself with a drop into something such as $17.82 and
then the next test of the $18 support within the coil would hit $17.96,
followed by a third move which tests the $18 exactly and holds, often
forming a smaller congestion base at that exact price before breaking
on that third test. Today PDLI reversed back into that price level and
hence it served as resistance. The highs of the day were $18.12 with a
closing price of $17.87. Both were well within the $18 price resistance
The second type of price
support/resistance that I wish to cover is closely tied to the first.
It deals with retests of previous pivot highs or lows. A "pivot" is
simply a level where prices reverse. You can usually identify them by
the "V" or upside down "V" that they form. You may not see them
unless you drop down to smaller time frames if the security is in a
congestion. Sometimes these price pivots correspond to whole number
s/r, sometimes they do not.
FIGURE 4 - $DJI Daily
In this example of the Dow, it does
correspond to the whole number support/resistance levels (Figure 4). We
are looking first at the 14,000 level. This hit in July for the first
time and then retraced back into the prices from the first quarter.
When the Dow hit the 14,000 zone for the second time, it was actually
at the end of September that this took place, coming off a sharp rally
The "zone" of the 14,000 high was
where all the price bars overlapped at the initial 14,000 highs. The
stronger upside momentum on the second test of the 14,000 resistance
level allowed the Dow to push somewhat past the exact high to form a
slightly higher high before the momentum reversed and led the index
back into the previous lows. The August lows were made on extreme
downside momentum. Since the pace was slower into November on that
second retracement off the 14,000 highs, it did not quite hit the exact
lows from August, but only came into the support "zone" of those lows.
FIGURE 5 - JBLU Daily
Another example was the $10 level I
had mentioned earlier in JBLU (Figure 5). You can see that while $10
hit and held on the first day into that level in April. It then rolled
over a bit off the lows, like the Dow did off the second highs, and
made somewhat lower lows. It did not quite hit that $10 support the
second time around, although it did retest the "zone" of that support
Whole number support/resistance can
also be tied into the third type of price support/resistance:
congestion zones. When a security falls into a trading range,
congestion zone, base, coil, or whatever you wish to call it, that zone
becomes s/r on any retracement once it has broken. A breakout to the
upside from a trading range will mean that the range itself becomes
support on any retest of it. These trading ranges often take place
around whole numbers.
FIGURE 6 - $DJI Daily
As in the other types of s/r, the
stronger the congestion is retested, the more the security can
penetrate that s/r zone. A more shallow move into the congestion after
it breaks lower and is moving higher, such as in "A" in Figure 6, can
mean that the lower end of the range tests and holds first like it did
a few weeks before "A".
A stronger move, such as into "1" on
a pullback off highs on an upside breakout, can lead it to testing the
lower end of the channel before it sees much reaction. In #2 it also
pulls into the lower half of the earlier congestion, which also
corresponds to the 13,400 whole number support and the pivot high in
"B". In this case, #2 has all three types of price support we have
covered thus far interacting at the same time, making it a very
substantial support level!
FIGURE 7 - JBLU Daily
Another example of this type of s/r
also took place on the chart of JBLU (Figure 7). Not only was the July
test of $12 a return to the whole number as price resistance, but it
was also resistance from that earlier congestion level.
FIGURE 8 - PDLI Daily
PDLI has two examples (Figure 8). The
first is a larger congestion back in September and the second is just a
three day congestion in mid-October. Since the price drop into the
larger congestion was very rapid, it pulled to the lower end of it in
the second half of Oct., while the smaller congestion served as
resistance on the bounce off the Oct. lows.
The final type of price support or
resistance that I will show you today is an equal or measured move. You
can call them whichever you wish :) This concept is rooted in momentum
as well. Essentially, if a price move is followed by a congestion, such
as a base, flag, etc., then as long as the congestion breaks at about
the same momentum as the move into it, it will have the strong
potential to hit an equal move level on that continuation.
FIGURE 9 - JBLU Daily
JBLU has two such examples on this
daily chart (Figure 9). Obviously you can combine this with the other
types of s/r to help establish targets, even if something is at new
FIGURE 10 - PDLI Daily
PDLI (Figure 10) also had this take
place when the correction off the Oct. lows gave way and the new
congestion zone into November broke lower at the same rate of selling
as it had seen heading into that congestion level. It was unable
to mimic the move for a third time, however, due to a much more
substantial support level from the lows in 2006. This was the first
time that larger support zone had been retested, so it was unable to
easily break through it.
Smaller time frame support or
resistance levels will always be easier to bust than those on a larger
time frame, even though the zones on the larger time frames will be
wider. At the same time, support or resistance levels which have most
of these types of support or resistance hitting at about the same time
will also be stronger than if only one of these 4 hits at any given
time. Since the prices of each will not tend to line up exactly, this
is another reason you must consider them to be ZONES and NOT EXACT
In my class on December 20th, I will
pick up on the topic of support and resistance by examining trends and
channel support and resistance and how to best utilize those in
combination with the 4 types we have already covered today. Thank you
guys for coming! I have now unmoderated the room, so please feel free
to post any questions you may have.
speculatormike: Very helpful, thank you Toni
Sunrise: thanks Toni - good stuff, nice review!
chastain: Thanks Toni. Very good info.
Helena1045: Thank you!
trauma: thanks Toni
Toni: You're welcome!
lhb: Toni, if a support level is broken,
thereby becoming Resistance, and later on, if that resistance is
broken, do you then discard that area as a s/r level since we have
traded below and above it?
Toni: Typically I will then back up a time
frame, see if I still notice any sharp pivot level or such at that
point. The closer the price is to a previous level, the stronger it is.
So, the further away it is in time, the more likely I will be to look
at more recent levels.
ymtrader: Something I'm interested in is deciding
when a resistance has been broken definitely. I was nailed once today
on YM at pivot R2 where I shorted @ R2 as it completely looked like it
was reversing, then it shot through resistance. So far in my world it's
just "one of those things that can happen"...Curious on ways to
alleviate that other than tight stops (which I had).
Toni: This is where other building blocks for
price development becomes very important. Things like momentum, volume,
trend placement, etc. will help you eliminate or significantly reduce
ymtrader: Gotchya, thanks. All things I sort
of know are important but haven't studied enough.
lhb: Which of the different type of s/r is the
Toni: I do not think one is any stronger than
the other by itself. When they are combined, they become more powerful.
So, one alone would be considered weaker than two or three.
ShootingStarr54: When using a pivot calculator How
important is it to include the open price vs just the previous day HLC?
Toni: This is an interesting question because I
have not used a pivot calculator in about 7+ years... :) The thing is,
people use several ways to enter their data into them, so even with
that, I would not rely solely on the calculator and instead combine it
with these other forms. Gaps are something I did not talk about today,
but opening and closing gap prices are a 5th form of price s/r.
lhb: ss54, standard floor pivots only use the
prior day HLC, so open is not relevant.
ShootingStarr54: thanks Toni & ihb
joaohgomes: Toni, when do you consider zone of support
or resistance no longer valid as reference point?
Toni: This essentially goes back to my
previous answer... If I am daytrading futures, I tend to only use the
prior day for the smaller s/r levels and then keep back off to larger
time frames. For instance, heading into the upcoming session, the
5 min highs and lows in the current session will be strong s/r to watch
for on most days. A week later, however, the highs and lows on a 15 or
30 min chart become more important.
speculatormike: Is this material on your CD-ROM course?
Toni: Yes, the course is about 7 hours covering
each of the 5 building blocks I use for analyzing price development.
The 5 are the support/resistance, volume, trend development/trend
placement, momentum, and correction periods.
lhb: On the mini futures, shouldn't one be
aware of whole number support on the cash index as well? For example,
if Dow is near 13,000 I was wondering if the reverse is true, i.e. if
futures are near whole number will it affect cash index generally....
Seems like a lot to be aware of...
Toni: Yes, that is helpful, but I admit that I
personally don't look at it :)
ymtrader: This is true, I was wondering that
today... when the cash index is flirting around a round number and the
futures are not
lhb: ok, thanks
joaohgomes: Toni, I'll try to rephrase my question:
suppose a resistance is overcome an than become support, what event
must happen so you will not consider these zones as valid
Toni: One instance would be let's say that the
resistance is the $100 level it breaks higher but the momentum on the
breakout is rather weak and it barely pushes to new highs maybe $101
then it can turn with such sharp momentum that it breaks back past the
$100 level very quickly, maybe only stalling for a minute before
dropping under the congestion.
lhb: $100 is probably bad example, because
that is always going to be whole number s/r.
Toni: Well hence the minute stall :) A
similar concept can be used on breakouts to new highs. If a
security rallies to $100 then pulls back but it pulls back very slowly
puts in new highs at like $99.70 or something. Then when it breaks that
$99.70, if the $100 level is relatively close, it can push through it
very quickly without really correcting again for much time at all. This
is something that catches people off guard... They buy a bull flag, for
instance, and assume the previous high at the start of the flag will be
strong resistance. If the flag still formed within the upper 1/4 or so
of the previous upside move into the flag, however, it might not stall
at all at the previous high, yet people still tend to use it as a
target and get worried about it when they shouldn't.
ShootingStarr54: Would you be more aggressive taking a
trade based on the futures being up or down?
Toni: Yes, if you mean a setup occurring
which corresponds to favor from the futures market. A lot of momentum
and news stocks I will play will less regard to the futures market.
unocapricorn: If you are trading the SPY would you base
you actual entry & exit by SPY or how much should SPX influence it?
Toni: When this question comes up, I am often
dealing with people who wish to start trading futures for better tax
and leverage reasons, so they should definitely take their triggers
based upon the futures market. For just ETF traders though, then I like
using the indices themselves to just show clearer price action. SPX,
COMPX, DJI etc
joaohgomes: http://i5.tinypic.com/6qbmqf4.gif will
you consider this level as resistance?
Toni: correct :)
joaohgomes: ok... tks
Toni: Ok gang, I have to get going to feed my
kids before they organize a revolt :)
lhb: thanks, Toni
Toni: Thanks again for coming today!
onewrite: Thanks Toni
Biegs: thanks toni!
Toni: you're welcome!
unocapricorn: thanks Toni
Toni: I'll see you guys on the 20th! 4:15
jmb: Thanks Toni
thomas175: thanks Toni
Toni: You're welcome!
joaohgomes: thank you Toni ... enjoyed the
joaohgomes: gn all
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