With nothing in the “news” of any significance that could affect the market being released today we looked at the charts.
Over the past few weeks Vahid has spoken a lot about support and resistance lines. Today was no exception. He made some examples of these on the S&P 500 which I have attempted to duplicate below. I suggest you take a picture of the chart below on your phone while reading on another device, so you can better understand as I refer to it often below.
HOW DO WE “READ” AND “USE” SUPPORT AND RESISTANCE LINES IN TRADING?
These support (upper) and resistance lines (lower) are a fundamental part of the trading strategy and in order to move forward, we need to pay attention to this basic premise. This is where certain levels are either resisting an attempt by bulls to push higher through a bear line, or conversely a bears trying to push prices lower through a support line.
In the chart below, I have included support and resistance lines to show the scenario:
During the early hours in global markets before the US market opened, you can see GREEN resistance line A and RED Support line B are beginning to converge (getting narrower) Often this will be indicative of either a break to the upside or the downside. Sure enough this happened to the downside after numerous tests of the RED support line B.
The reason these lines are important is in order for us to be able to project a break out either above or below the support and resistance lines. To do this more effectively we need to test support and resistance with a confirmation candle . Often support or resistance lines will at first appear broken but will then push back. This is why we need a further candle in day trading to confirm the break.
As we can clearly see, green GREEN resistance line A showed strong resistance by the bears. We did see is broken by the bulls at one point but this failed and the bears took back control again pushing the price all the way down to the B support line where the following red candle broke through and the following candle confirmed the break was real.
The bears were not allowing the price to move up to break the GREEN resistance line A. Similarly we see that RED resistance line A was also being respected despite numerous attempts to break it by the bears. The Bulls held firm until eventually, RED B support line was broken by the bears. This is where you see the upper arrow. The next candle is the confirmation. It would have been possible to take a sell position here as the price did eventually dip and returned around 2%.
The market dipped lower until finding the WHITE C support line. We then saw the RED B support line act a “resistance” line . RED B line (now acting as resistance) was now being tested by the bulls (as we can see with the lower arrow) but continued to hold twice by the bears eventually pushing back down to below the C support line. As we then can see this was a failed attempt by the bears to also break the White Support line C. Then the indicator we referred to yesterday the RSI confirmed the likely move higher.
As we discussed yesterday we had further confirmation of a likely bull run starting around the White support line C. The RSI indicator clearly shows an upward trending marking (green line at the bottom) , while the White c support line is showing a downward trending market. This is called “bullish divergence” and another signal the market is due for a reversal to higher prices in the short term. I suspect Vahid may cover RSI in future sessions, but I know he wants to keep things as simple as possible; however confirmation indicators like this will add to our confidence taking a position when eventually we may all be on our own.
When the market opened up we saw an attempt to break the Green A resistance line succeed and we took a long position which took our profit for the day of 2%.
We ended the day with a nice 2% banked profit and thanks to the lesson on support and resistance we took the right trade, at the right time today, and 15 minutes later we closed out.
There was no Q and A session today as Vahid had appointments. We agreed to meet up again as usual on Monday.
Have a great weekend everyone and see you all on Monday 🙂