Support and Resistance
Lesson 4 of 87 min6 exercises
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The Foundation of Technical Analysis
Support and resistance are the most important concepts in technical analysis. They represent price levels where buying or selling pressure tends to emerge.
Support: A price level where buyers tend to step in, preventing further decline. Think of it as a "floor."
Resistance: A price level where sellers tend to step in, preventing further rise. Think of it as a "ceiling."
Resistance: A price level where sellers tend to step in, preventing further rise. Think of it as a "ceiling."
Example
If GME bounces off $20 three times, $20 becomes a strong support level. Traders expect buyers to defend this level again.
The more times a level is tested, the stronger it becomes
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How Support/Resistance Forms
These levels form because of trader psychology:
1. Previous highs/lows: Traders remember where price reversed
2. Round numbers: $20, $50, $100 are psychological barriers
3. Moving averages: Many traders watch 20, 50, 200 SMAs
4. Gap fills: Prices often return to fill gaps
1. Previous highs/lows: Traders remember where price reversed
2. Round numbers: $20, $50, $100 are psychological barriers
3. Moving averages: Many traders watch 20, 50, 200 SMAs
4. Gap fills: Prices often return to fill gaps
Tip
SUTOK automatically detects and displays support/resistance levels in your analysis. Look for levels with multiple touches.
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The Flip: Support Becomes Resistance
When price breaks through a level, the roles reverse:
- Broken support becomes resistance: If $20 support breaks, price often bounces off $20 from below (now resistance)
- Broken resistance becomes support: If $25 resistance breaks, it often becomes new support
- Broken support becomes resistance: If $20 support breaks, price often bounces off $20 from below (now resistance)
- Broken resistance becomes support: If $25 resistance breaks, it often becomes new support
Example
GME breaks above $25 resistance → $25 becomes new support → Pullback to $25 is a buying opportunity
This is called "support/resistance flip" or "polarity change"
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Trading Support and Resistance
At Support (looking to buy):
- Wait for bullish confirmation (hammer, bullish engulfing)
- Set stop-loss just below support
- Target the next resistance level
At Resistance (looking to sell/short):
- Wait for bearish confirmation (shooting star, bearish engulfing)
- Set stop-loss just above resistance
- Target the next support level
- Wait for bullish confirmation (hammer, bullish engulfing)
- Set stop-loss just below support
- Target the next resistance level
At Resistance (looking to sell/short):
- Wait for bearish confirmation (shooting star, bearish engulfing)
- Set stop-loss just above resistance
- Target the next support level
Watch out
Support and resistance are zones, not exact prices. Allow some wiggle room (1-2%) when setting stops.
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Key takeaways
- Support is a floor where buyers step in; resistance is a ceiling where sellers step in
- The more times a level is tested, the stronger it becomes
- Broken support becomes resistance, broken resistance becomes support
- Trade bounces off these levels with proper confirmation
Next: 6 quick exercises. Miss one and it comes back at the end.