Support and Resistance Part 1

Tom Gentile

Posted in
Technical Analysis

By: Tom Gentile
April 5th, 2024

5 mins read

Whether you trade securities or options on those securities you are likely using charts of them to find your entry and exit points for your trades.

You all know me by now and though I have long-term investments I am primarily an options trader.

Even though I mostly trade options on securities and not the securities themselves I still need to know first and foremost my anticipated price move for the security.

That is what I will discuss in this piece. This is Part 1 of 2.

The Markets Seem Confused

As I see it traders, of options or just securities seem to have a tug of war going in their minds.  On the one hand they want a strong economy and corporate earnings to continue to grow. On the other hand, they want a weaker jobs market so the Federal Reserve will be more apt to begin cutting interest rates.

When the fundamentals and the big picture economic concerns aren’t the best of help in ascertaining a directional bias I go to the technicals. Truthfully, I ALWAYS go to the technicals.

Support and Resistance

There are tons of technical indicators and oscillators that people have to choose from. The ones that are wrong or right are the ones that are wrong or right for you.

I am a big fan and proponent of using Support and Resistance.

I explain Support as the price point where a security gets supported from going any lower.  It is like a floor for the security.

I explain Resistance as the price point where a security resists going any higher. It is like a ceiling for the security.

90-day Candle Chart KO
Figure 1: 90-day Candle Chart KO

Figure 1 above is as clear a picture I can find of a security whose recent price action, recent as in the past few months, trading between support and resistance.

You can see how technical analysis is more art than science as it is tough to find a ‘to the penny accurate’ price support low and resistance high.

Its more artistic in that I refer to a price area than a specific price point.

How to Trade Support and Resistance (Security)

From a viewpoint of just trading the security one can go long or buy KO at the support price area of $59 with the intention to sell KO at $61.

From an investment point of view one may not get too excited when they see a chart like this because from the first of the year to present one could have bought it at $59 and it is still at $59 3 months later.

From a traders point of view, they could have bought KO at $59 and sold it at $61 making 2-points  each time.

$2 on a $59 stock is only a 3.3% Rate of Return. But think about it that is 3.3% ROR each time.

One could have executed that trade 3 times already this year. That’s a cumulative 6-points. Look at it like this. $6 on a $59 cost is now 10%. That’s a gain of profits equaling a 10% rate of return thus far this year.

Not that I am recommending any trade, but if you an astute chartist would recognize KO is currently at or just up from support of $59. This may be the start of the 4th move from support of $59 to resistance of $61 to come, (no guarantee).

How to Trade Support and Resistance (Options)

For those of you who favor option like I do a consideration is to go long or Buy to Open Call options at support with the intent to Sell to Close the option at resistance.

The latest time KO made a run from $59 to $61 was March 08 to March 13. It isn’t often one can expect a move that quick, but they do happen as you can see.

March 08, (price support area), the April 19, 2024, $60 Call option looks like it could have been had for $1.00 per contract. At the close of markets on March 13 (price resistance area) it looks like they could have been closed at $1.55 per contract.

That’s a gain of $0.55 per contract. Less than the $2 per share on the security, but the ROR is much greater because your risk isn’t $59, but only the cost per contract of the option of $1.

$0.55 on a cost of $1 = 55% ROR.

Let’s say hypothetically one was to get $0.55 three times risking only that $1 each time, again hypothetical, but you see the educational point. That’s a cumulative gain of $1.65 on $1 cost or a gain so far this year of 165%.

Take look at figure 2 as I provide a visual of how the long call option scenario could have played out so far in 2024.

Long Calls / Close Calls KO 2024 thus far
Figure 2: Long Calls / Close Calls KO 2024 thus far

Plot points 1-4 show where one could have went long call options on support and then considered selling to close for profit the calls at resistance.

Boxed in with the yellow color, plot point 3, is the example shown earlier in my education.

Plot point 4 is showing KO on price support where one can consider and discuss with their broker if going long a call option on KO is prudent.

In part 2 I will discuss another technical lesson with support and resistance where one of my favorite technical patterns forms called Old Resistance becomes New Support (and vice versa).

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