Support is the level below which stock may not fall for a particular time frame. And Resistance is the level above which stock may not rise for a time being. These are purely subjective and time oriented.
Now coming to techniques to find out these levels, I can say there are various techniques. Depending upon once convenient one can use different techniques. And it also depends upon your experience with the charts, how you look at charts. Some times by looking at just price chart I can say what are the supports & resistance levels for that chart? And some times I need other techniques (indicators & indicators) which I am going to explain you guys. As usually I call myself BACCHHA in this area, I try my level best to explain whatever I know. And my non technical readers please bear with me on this topic.
The below mentioned technique is the observation method. By experience you can find out this one. The Resistance & Support levels of SBI scrip in the months of November to February are as shown. You can see that 2200 level acting as a support where as 2450 level is acting as resistance level. In mid February the scrip breaks the support level but trader’s thinks that price not worth, therefore trader’s remorse occurs. And once scrips breached the support level more confidently in the March month, from that point onwards it has become the resistance level.
Moving Averages
Moving averages are the major helpful indicators in the Technical Analysis area. Depending upon your requirements MAs can be used for multiple purposes. Now we will see how MAs can be used for resistance and support levels.
Here in MAs you need to decide whether you are Trader or Investor. If you are trader then depending upon up on your trading period you can choose the MA levels. Like 5DMA, 10DMAs, 15DMAs and so on. If you are the long term investor then you have to check out with the 200DMA. For convenient I am using 60DMA for the following chart
Here you can see that 60 DMA is acting as support in mid October @ 1600levels and resistance in mid February @ 2300 levels. And once again you can that once stock hits the 1600 levels stock nearly bounce back to 1800 levels.
Bollinger Band
Bollinger Bands are considered some of the most useful bands in technical analysis, for they vary in distance from the moving average of a security's price based on the security's volatility. During periods of increased fluctuation, the bands widen to take this into account, and when the fluctuation decreases, the bands are tapered for a narrower focus to the price range.
Even though Bollinger bands don’t clearly give an idea about the resistance and support levels they give you an idea about the stocks volatility. So through that range we can find out these levels.
As explained above, Bollinger band is most wide in the months of February and March, indicating higher volatility in the price. As you can see, the price moved from 2200 levels 1600 levels, Now you can see that in the April month the width of Bollinger band is narrowed maximum indicating calm market as not much price movement. And this indicates the upcoming volatility in the price as shown in the graph that from May month onwards again there is lot of volatility in the price movements.
Fibonacci Retracement
This is the most important tool in identifying the resistance and support levels is based on the key numbers identified by mathematician Leonardo Fibonacci. The principle behind a Fibonacci Retracement is that after a stock moves upward or downward, the price will often retrace or correct some of this movement. Many technical analysts believe that the amount of Retracement will often correspond to one of the Fibonacci levels. The five horizontal lines represent percentages of 100%, 61.8%, 50%, 38.2%, 23.6% and 0%
The Fibonacci sequence of numbers is as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. One of the remarkable characteristics of this numerical sequence is that each number is approximately 1.618 times greater than the preceding number.
The key Fibonacci ratio of 61.8% - also referred to as "the golden ratio" or "the golden mean" - is found by dividing one number in the series by the number that follows it. For example: 8/13 = 0.6153, and 55/89 = 0.6179.
The 38.2% ratio is found by dividing one number in the series by the number that is found two places to the right. For example: 55/144 = 0.3819.
The 23.6% ratio is found by dividing one number in the series by the number that is three places to the right. For example: 8/34 = 0.2352.
Even though 50% is not a Fibonacci ratio, many traders including me like using the 50% because of the overwhelming tendency for an asset to continue in a certain direction once it completes a 50% Retracement.
As graph indicates, at various point of time there are different levels of support and resistance.
Apart from these there are various other indicators like Stochastic oscillator (one of my favorite), RSI, MACD and so on… But I think these are sufficient for guys…
Bottom-line
It all depends upon how you look at charts…
Keep reading…
Keep investing…
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