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How To Find Support and Resistance

Probably the most fundamental technical analysis technique when trading stocks and options is the ability to find support and resistance on a stock chart.

Simply put support and resistance are levels on a chart are areas where price has reacted in the past and can potentially react to again in the future.

Now why would we want to attempt to draw-in support and resistance levels on a stock chart? These support and resistance levels can show where possible trade opportunities will arise as many stocks will either rise from or stall-out at these levels.

There are specific criteria you can look for when attempting to define support and resistance levels:

  1. Swing Highs & Swing Lows
    We look for the extreme swing highs and swing lows that price has reached in recent time.
  2. Look for multiple price rejections of an area. The more the better. A price rejection is where a price reaches a certain level on the upside, but never significantly higher.
  3. The Level Should Be Obvious – It should jump right out at you. You should be able to spot the level right away when looking at a chart.
  4. The Move Away Was Drastic. When the price hit the support or resistance level, the move away from that level was drastic in the opposite direction.
  5. The Level Has Acted as Both Support And Resistance. The level has been respected from both sides.
  6. The Level was recently respected or formed in a recent time period.

You do not need all of the above 6 criteria to make a level “support” or “resistance”, however, the more traits the level has, the better.

Let’s look at a few charts to supplement our 6 traits of support and resistance:

Trait #1: Extreme Swing Highs and Swing Lows

Below is a chart of Tyson Foods (TSN) You can see a well-formed level of resistance at around the $84 level. Price climbed up to this level and reached it, but did not go higher. The stock has a massive move from $49 to $84 over the course of 6 months.

Trait #2: Multiple Price Rejections

The below chart is of Salesforce (CRM). You’ll notice that the stock went up to around the $167 level multiple times, and each time came back down sharply.

Trait #3 The Level Should Be Obvious

As in the two examples above, there is a well-defined line where can easily spot the level where the stock reaches and then comes back down (or back up). In this example of Advanced Auto Parts, we see a well-defined level of support at $156. The stock hit that level multiple times while never going below.

Trait #4 – The Move Away Was Drastic

The chart below of Dollar Tree illustrates a drastice move away from resistance. DLTR hits the 113-114 range and then takes a sharp drop.

Trait #5 – The Level Has Acted as Both Support And Resistance

This chart of Amazon, we can see the $1700 level has acted as both support and resistance.

Trait #6 – The Level Was Recently Respected or Formed In A Recent Time Period

In this chart of AVGO, we can see the price running into a possible resistance level. We’d watch this closely to see if it breaks through or begins to sharply pull-back.

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