A Trader’s Guide to Market Analysis
Yesterday I wrote to you about resistance levels and how they help us to navigate the markets.
Today I want to talk to you about the opposite of resistance: support.
Support represents a line at which stocks refuse to break lower.
From a supply and demand perspective, support is where buyers come into the market to absorb selling pressure. This is what stops the markets from breaking down further.
I bring all of this up because yesterday, we got a taste of how support works.
A Hallmark of Strong Rallies
Stocks sold off hard yesterday afternoon. However, they held support at 2,870 on the S&P 500.
As you can see, this level has been extremely significant for stocks running as far back as March. Stocks staged their first major bounce here after the initial decline.
This is particularly strong support because it had acted previously as resistance back in late April. As you can see in the chart below, stocks struggled to break above this line at that time.
Thus, this line is an example of what traders would call “former resistance, acting as support” – a situation in which a price level that was previously difficult for stocks to break above is now EXTREMELY difficult for stocks to break below.
This is a hallmark of strong rallies. They routinely break through resistance levels and then back-test them, indicating that those resistance lines are now support.
This is THE line I’m watching today. If stocks hold here, we’ll have a buying opportunity as the uptrend remains intact.
Editor, Money & Crisis