What Happens When a Security Breaks Support

Tom Gentile

Posted in
Technical Analysis

By: Tom Gentile
December 9th, 2022

3 mins read

Today the markets ultimately traded lower on the day.

The Producer Price Index (PPI) came out this morning and the numbers were hotter’ than expected. The PPI is a measure of what companies get for their products.  The numbers showed an increased 0.3% for the month and 7.4% from a year ago.

Just when we thought inflation might be cooling off.

This dropped the markets from the get-go. It tried to rally into midday, but truly dropped the last hour of trade.

Figure 1: 20-point Range Emphasized on SPY
Figure 1: 20-point Range Emphasized on SPY

SPY has not broken support (yet).  It is trading at or near support, though and one thing we can do as technical traders is assess a potential price target lower should it break support on a closing price basis.

One can also do this for the reverse to happen, where a stock breaks above resistance of a sideways trading range on a closing basis.

Determine the Width of the Trading Range

A stock is deemed in a sideways or box trading range when it’s direction on the chart is going sideways.

When that happens, you want to establish a horizontal support and resistance.  Usually, a test of a price area at least twice is the more certain way to establish support and resistance.  You can see there is only one price peak for resistance so this may be a bit early to call, but we will establish that as resistance for the point of this education.

What one can do in taking an option trade (or stock trade) is assess the price width of the range; the distance between support and resistance.

As can be seen in Figure 1, the range looks like 20-points.

Then when the security breaks support, subtract that price amount from the support price and that could end up being the price target for the security.

In this case, should SPY break 390, subtract 20 from 390 and SPY may trade lower to 370.

Trade Management

One part of trade management is to establish a price target for a security that way one can establish a price to get out of the trade.  It is also good to establish a technical price stop to protect and preserve some capital on the trade by knowing when to stop out.

In a trade like this where the entry is a break of support and a price targe tis in place lower, consider the resistance price of the box range as your technical price stop.  This ends up being an initial risk to reward ratio of 1:1 on the security.

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