Technical Analysis is an art not a science! Always remember that.
As an investor I pride myself in conducting fundamental analysis (balance sheets, business models, etc) in order to gather a long term view of a company. However, if I am concerned with the short term performance of a stock I rely on technical analysis.
Today I am going to show you how I identify support and resistance lines using technical analysis and how you can do the same for absolutely FREE using Stockcharts!
What are support & resistance lines?
- Support Lines: The price where demand for the stock is considered to be strong enough to prevent a further price decline. In short the price where a significant amount of investors would consider the price a discount and start buying heavily.
- Resistance Lines: The price where selling pressure for the stock is considered to be strong enough to prevent the price from rising further. Basically the price where people would be happy to sell and take there money else where.
Now that you have the definition lets see what support and resistance lines actually look like.
Support lines are typically below the current price of a stock, but it is not uncommon for a security to trade at or near support (like in this case). Remember this is not an exact science and it is difficult to set exact support lines. In mid May of 2012 Apple made a low of $525.45, you can look further in the past during early March and see that the share price was trading around the same price. Now look at mid November and take note of how the price closed at $525.62. At these 3 price points Apple has turned around and climbed higher. This is what support lines look like!
Resistance lines are typically above the current price of a stock, but it is not uncommon for a security to trade at or near resistance (like in this case). Remember this is not an exact science and it is difficult to set exact resistance lines. In early June of 2012 MGM Resorts International closed at $11.39, then in mid September closed at $11.41, and closed at $11.17 in mid October. All 3 times the share price of MGM closed near $11.50 it immediately sold off and started trading lower. This is what resistance looks like!
If you want to be successful at technical analysis you must have the ability to identify key support and resistance lines. I know it is difficult to establish precise support and resistance lines, but being conscious of their presence and location will significantly enhance your analysis and forecasting abilities.
When a security is approaching a key support or resistance level you should be watchful for any technical indicators and a potential reversal. If a support or resistance line is broken, it signals that the relationship between supply and demand (Bears & Bulls) has changed. A break of a resistance line signals that demand (bulls) has gained the upper hand and a break of a support line signals that supply (bears) has won the battle.
You can conduct you technical analysis at Stockcharts for FREE! An email address is not required to use their service. I personally have used stockcharts for over 2 years and love their service. You will not be disappointed.
Here’s to Our Wealth!