Putting Our Market Skills to the Test
In the last few days, we’ve covered the trading terms “resistance” and “support.”
By way of review:
- Resistance is a particular price level that stocks struggle to break above. From a supply and demand perspective, resistance represents a level at which buying demand struggles to overcome selling pressure. As a result, this level acts as “resistance” to a rally.
- 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.
We got a sense of the significance of both over the last few days. Stocks failed to break above resistance at 2,930 on the S&P 500 (red line below) and proceeded to drop to support at 2,800 (green line).
To anyone who had already charted out these lines, yesterday’s selloff wasn’t that scary. However, if you hadn’t already looked to see where support lay, the selling pressure yesterday was likely very worrisome.
I know this for a fact. I saw a number of investors calling for a “crash” or stating that “the top is in” — despite the fact that stocks are roughly trading at the same levels as they have been for the last three weeks!
Blocking Out the Emotional Noise
If you want to make money as a trader, it’s absolutely essential to get your emotions under control.
This is why concepts like resistance and support are so important. They introduce a sense of discipline that stops you from trading based on feelings.
With that in mind, now that stocks are breaking down, I’ve drawn the key support lines to watch on the chart below.
Rather than predicting a crash, these are the levels I’m watching for the stock market.
If we break below 2,800 on the S&P 500 on heavy selling, the next level is 2,730.
However, if stocks CANNOT break below 2,800 on the S&P 500, this tells us that the bears are not committed. That opens the door to a major reversal and move higher.
Again, I’m watching how stocks handle the 2,800 level closely today. I recommend you do the same.
Editor, Money & Crisis