Chapter 15 – Significance of Support and Resistance

Significance of Support and Resistance

  • Extended trend line
    • Sloping trend line where previous support becomes resistance, previous resistance becomes support.
  • More times a support and resistance zone has been able to reverse a price trend, greater it’s significance.
  • Round numbers offers good support and resistance.
    • E.g. Dow Jones at 10,000 points.
  • The greater the quantity of stocks that changes hand (i.e. volume) at a given support and resistance level, the greater it’s importance.

 

Chapter 16 – Trend Line Break

Trend line break

  • Trend line breaks can signal reversals or consolidations.
    • Unfortunately, there is no way of telling at time of violation which will be the outcome.
    • Use other indications/tell-tale signs to reinforce.
    • Volume (is volume together with trend?)
    • Patterns (any reversal patterns?)
    • Angle of slop of trend line (price pierces a steep trend line, it often moves subsequently at a slower pace, following a more gradual trend line).
  • Do not assume that a trend line will break unless it has already broken.
    • Do not jump gun.
    • Trend line break only valid if prices closes on the other side of a trend line.
    • Determining trend line break is difficult especially if you are in the trade.
  • It may take more than one try for trend line to break.
    • Trend lines are like fence – where bulls and bears are held. They can violate a little bit without toppling the fence.
    • Many tries needed to convince bulls and bears to switch position.
    • Can break upwards or downwards – watch out for tell-tae signs e.g. volume, moving averages, continued strength or weakness (higher low or lower high).
  • Always look for the next/nearest support/resistance trend line to evaluate your risk and probability of trade.
Trend line break

Trend line break (see top right hand corner)

 

Throwback and pullbacks

  • Not often taught or practiced in Singapore.
  • Offers a chance to sell/buy upon confirmation or a better price.
  • May or may not occur after a trend line break – can only anticipate that it will happen.
  • More often in steep trend line break.
  • Pullbacks
    • Occurs after a downward breakout when price returns to, or comes very close to the breakout price or trend line.
  • Throwbacks
    • Occurs after an upward breakout when price declines to, or comes very close to breakout price or trend line.
Practical Technical Analysis by TerraSeeds 2006 Course Material Page 48

Practical Technical Analysis by TerraSeeds 2006 Course Material Page 48

 

Trading Tactics

  • Break up of a down-sloping trend line.
    • Accompanied by expansion in volume.
    • Heavy volume traded at breakout (breakout volume) around 2-3 times more than average volume of previous 5 days.
    • Buy when bar close above resistance.
    • Buy on throwback towards/near to immediate support (ideally on low volume).
  • Break down of an up-sloping trend line.
    • Expansion in volume not compulsory.
    • Although very bearish tone if break is accompanied with heavy volume.
    • Sell when bar close below support.
    • Sell on pullback (on falling volume) towards/near to immediate resistance.
  • Should you trade on breakouts?
    • Depends on risk profile.
    • Market fake breakouts, which will result in whipsaws.
    • Some professionals prefer to let price settle for 2-3 days after breakout; some prefer to buy/sell on continuation pattern.
    • Check next strong support and resistance level.
    • Check strength of breakouts.

 

Study examples

8 Singapore blue chips that broke decade-long trend lines

Sembcorp (U96.SG) monthly chart from 1999 - July 2015

Sembcorp (U96.SG) monthly chart from 1999 – July 2015

 

Chapter 17 – Trend Channel

Trend Channel

  • Parallel or almost parallel line to basic trend line.
  • Channel can be up-sloping, down-sloping or horizontal.

 

Trading tactics of Trend Channel

  • Up-sloping trend channel
    • Buy on breakout of upper trend line – upward movement now becomes accelerated.
    • Support found on upper trend line.
    • Sell on breakout of lower trend line.
    • Resistance found on lower trend line.
Trading tactics for up-sloping trend channel

Trading tactics for up-sloping trend channel

 

  • Down-sloping trend channel
    • Sell on breakout of lower trend line- downward movement now becomes accelerated.
    • Resistance found on lower trend line.
    • Buy on breakout of upper trend line.
    • Support found on upper trend line.
Trading tactics for down-sloping trend channel

Trading tactics for down-sloping trend channel

 

  • Horizontal trend channel
    • Upper trend line becomes resistance.
    • Lower trend line become support.
    • Apply ‘trading wining range’ strategy – buy low sell high.
Trading tactics for horizontal channel

Trading tactics for horizontal channel

 

Video demonstration on Youtube

How to drawn an equidistant (parallel) channel on MT4

 

Practical Technical Analysis (2006) Chapters 11-14Practical Technical Analysis (2006) Chapter 18

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