Technical Analysis Basics
Support and Resistance
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."
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
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
SUTOK automatically detects and displays support/resistance levels in your analysis. Look for levels with multiple touches.
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
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"
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
Support and resistance are zones, not exact prices. Allow some wiggle room (1-2%) when setting stops.
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