Set ups - part 3

Now onto Support and Resistance (S/R).  I'll go over the most basic info, but I strongly urge you to go to this Investopedia Link to learn more.

Support is simply this:

It's the price where buyers believe that the stock is at a good price to buy.  So, there's a ton of buying at that price and therefore that buying makes the stock go higher.

Resistance is simply this:

It's the price where sellers believe that the stock is at a good price to sell and take profits.  So, there's a ton of selling at that price and therefore that selling makes the stock go lower.

Also, once support is broken it then automatically becomes resistance.  Once resistance is broken it then automatically becomes support.

Think of support as a floor and resistance as a ceiling.

S/R can be horizontal or diagonal.  Moving averages can also be S/R.

Also, you need the stock price to touch S/R at least twice to make it valid.  One other thing to remember - S/R is an AREA not an exact price.  So when you make your S/R lines, think about making them with a marker not a laser.  

Looking at the chart above and following the top blue line:

1.  Initially, that blue line is resistance - you can see the stock went up to it and touched it a few times.

2.  Then the stock went lower, came back up to the resistance line, pulled back for 2 days, then hit it a final time and broke through it.  Now that resistance is support.

3.  The stock went higher, then came back down to the support (old resistance) line, touched it, and went back up for a couple of days.

4.  Finally, the stock broke back down through the support line and the line now becomes resistance again.

Now, lets look at the bottom purple line:

1.  The stock came down and touched the support a couple of times and went way higher.

2.  After about 6 weeks or so, the price comes back down to support and touches it once.  

3.  Some days later the stock then breaks down through the support, which then becomes resistance.

4.  Finally, the stock comes back up one last time, hit's that resistance (old support) and goes lower.