psychology. Eventually a stock falls far
enough so buyers are ready to overcome
the stock’s sellers. It’s possible investors
saw the stock previously bounce at these
levels several times in the recent past. Or,
maybe they noticed the stock had broken
through those levels multiple times and
then pulled back to those old highs. As more
people see the same price levels, it attracts
more interest. And, voila. Support is formed.
It’s not magical, but simply a reflection
of demand. This becomes a level where
buyers overwhelmed the stock’s sellers. The
opposite is true for resistance when sellers
overwhelm the buyers. So, how can you
identify these support and resistance levels?
THE POWER OF TWO
One approach is to use multiple technical
indicators together like, for example, the
MACD histogram and the stochastic (see
Figure 1). Stocks move up or down, but how
far down is low enough to qualify as a support level? It could be when both indicators
fall below their respective charts’ midpoints,
and turn higher. Then, you look at the corresponding price level for the stock and see if
it is at or above its prior low point. If so, you
may have a new support level that can be
used for a possible entry signal. As the stock
rises and both indicators climb above their
charts’ midpoints, new resistance levels may
be formed, especially if it’s in an area where
the stock has peaked before. These levels
may also be used for exits.
Using two indicators together helps to
smooth out random ups and downs and
provide some consistency. You can use this
kind of analysis on daily charts for intermediate trend trades with stocks, or on smaller
time frames for short-term positions, like
It’s not about randomly identifying entries
and exits for new positions. It’s about building a repeatable process using multiple technical indicators to identify common support
and resistance levels. And keep in mind other
approaches, including fundamental analysis,
may assert very different views. Have other
questions? Drop a line to thinkmoney@
tdameritrade.com so we can answer them in
the next Coach’s Corner column.
Enter and Exit…With Attitude
RANDOM DECISIONS LEAD TO RANDOM RESULTS. CONSIDER
USING THESE TWO INDICATORS MORE CONSISTENTLY AS YOU
GET IN AND OUT OF TRADES.
• EASY / TAKE AWAY: Pearls from your favorite Investools® instructors
• “BUY LOW, SELL HIGH.” You’ve heard this phrase a million times.
It’s so wired into your brain, it seems easy to determine where a stock’s
high and low points are. In reality, to find appropriate and consistent
entries (lows) and exits (highs) might just be one of the hardest skills
to master. The good news? There are different techniques you can
use to find the potential entry/exit spots. One is to identify a stock’s
support and resistance levels. It may sound easy, but it’s something
Investools students need help with all the time and a reason they rely
on our instructors to help them practice applying the concept.
HOW LOW CAN YOU GO?
Think of support and resistance levels respectively as floors and
ceilings. A stock can drop until it falls to its natural floor and bounces.
Prices can then rise until the stock reaches a natural ceiling and its
progress halts. This all sounds good in theory. But bring up a chart
to find these levels and you’ll be scratching your head. There are so
many ups and downs, it gets hard to choose which one is the floor, and
which one is just a step down the stairs, so to speak. This confusion is
why figuring out a bullish position’s entry can be tough. How many
times have you identified a stock that has “pulled back” and thought
to yourself it’s the perfect time for the stock to bounce, only to see it
continue a pullback?
I T’S ALL IN YOUR HEAD
Support and resistance may sound like geeky technical terms for
reading stock charts, but their existence is deeply rooted in investor
How to find support
Note that when both
MACD and stochastic
indicators agree that
a high or low has been
reached, and price is at
a previous high or low
point, it’s a stronger
signal that a support
or resistance level has
Source: TD Ameritrade. For
illustrative purposes, only.
Investools Inc. and
TD Ameritrade, Inc.
are separate but
not responsible for
each other’s services