Support and Resistance Part 3

Tom Gentile

Posted in
Technical Analysis

By: Tom Gentile
April 19th, 2024

5 mins read

Did you miss Part 2? Catch up here.

If I didn’t mention in my Part 2 write up on Support and Resistance that there are various types of situations where one can assess Support and Resistance that I could write more than 2 educational pieces on it, then let me iterate that now.

So far, I have educated you all on support and resistance in a sideways view and how one can trade between those two price points.

I’ve taught how old resistance can become new support and (vice versa) and how to consider and options trade when there is what’s called a change in polarity (which that pattern is).

I want to now show that situation when it comes to securities in an uptrend and how the change of polarity and be seen in up or down trends AND bring in how Moving Average lines (both simple and exponential) can be used as support and resistance.

I will end with showing a bit of Fibonacci and how one can look at the Fib retracement levels for pullbacks and retracements to help establish a conviction for where a security may find support or resistance using the Fib’s.

Old Support Becomes New Resistance (Up Trend)

This happened recently with the overall markets.

I will continue to use the chart of the SPY which is the ETF that tracks the S&P 500 Index.

In Figure 1 I highlight the ascending support line for SPY was broken on a large-ranged day (longer than normal red candle day). This happened as SPY was forming a double (some could say triple) top price resistance.

SPY tried to move back up in the subsequent three days after only to fail that attempt to retrace to highs and roll over even more.

100-day Candle Chart on SPY Break of Support
Figure 1: 100-day Candle Chart on SPY Break of Support

It would have been clearer that support is becoming new resistance if the price touched up at that old support line. But the change in polarity happened and the rollover was under way and the bears were taking control aggressively.

Moving Averages as Support and Resistance

I am using simple moving averages as most folks use those.

In Figure 2 I show the 10-day Simple Moving Average (SMA) and the 30-day.

I am not going to discuss the moving average crossover technical setup, but I add the 30-day in to show that eventually that may happened and when it does could add conviction to a technical analyst and options trader in both a bearish setup as you see or a bullish setup.

SPY broke down as we have already shown, but by adding in SMA’s one can see how a security can act a certain way around a moving average.

And there is no ‘set’ moving average number for all securities. Each security will behave a certain way around a period moving average that is unique to it.

In most cases, though, securities rarely move too far away from the 10-day SMA before coming back to it.

60-Day Candle Chart SPY Showing 10-Day SMA Change in Polarity
Figure 2: 60-Day Candle Chart SPY Showing 10-Day SMA Change in Polarity

On the large-ranged bearish candle one can see SPY broke the 10-day SMA support SPY had been riding for a number of months, (actually broke below that the prior two days).

On the days I mentioned SPY tried to muscle back up in price you can see where it did not reach the prior price resistance or ascending support line (at the time), but instead only made it back to the 10-day SMA and tested it a new resistance.

SPY has tested the 10-day SMA a few times since it topped, and the selling has accelerated a bit more to where the separation between the SPY and the 10-day SMA is increasing.

Eventually the anticipation is SPY will at least inch back towards the 10-day SMA.

Until then the question is where one might see a drop in price for SPY before it finds a support.

And for that one can analyze / use Fibonacci. 

Fibonacci Zones as Support and Resistance

Fibonacci is a technical tool that can be used to assess potential support and resistance price points.

150-Day Candel Chart SPY Fibonacci Retracement Zones

Figure 3: 150-Day Candel Chart SPY Fibonacci Retracement Zones

From a bullish perspective one wouldn’t really want to see any of these Fibonacci retracement levels get reached as that means an even lower price to come.

One can’t ignore those price levels as a possibility, though.

There are other Fibonacci retracement percentages that can be used and like moving averages, different securities can react at retracement sones unique to them.

Sine SPY was/is in an uptrend we are looking at Fib retracement zones to where a support price based on Fibonacci could be ascertained.

What the Fib tool does is it takes the lowest closing price to the highest closing price over a range of days and runs the math to calculate the percentage retracements.

One can change the Fib levels by changing the range of days analyzed.

What I try to do is find a range of days defined by a clear bottom and top to then run the Fib tool against.

Thanks for reading the now 3-part education provided on using Support and Resistance in your technical analysis. There are many technical indicators and oscillators, and a case can be made for any number of them or more than one at the same time.

The one thing that everyone can see, indicators be damned is price support and resistance, which to me is why it is one of the more reliable items to use in my technical analysis.

Tom Gentile
C1P: Chief 1-Percenter

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