Identifying Support and Resistance Levels

Learning to identify support and resistance levels is a great way to help recognize potential swing trades as well as provide assistance with figuring out good entry price levels.

In this post we'll go over some examples on a chart of IMAX I came across over this past weekend.

When learning to identify these key levels, you'll need to be able to add trend lines to a stock chart.

You can do this with a printed chart and then use a pen or pencil, or you can use your charting program if it has the capability. Either way will work fine.

If you take a look at the stock chart below, you'll notice I've drawn several sets of trend lines. As a review, a Trend Line is any line where you connect two or more points that you may extend past these two points for forecasting. These lines can be horizontal or diaganol in display.

Support and Resistance Levels

There are several things that stand out on this chart that can help identify future support and resistance levels with other stocks.

  • Dotted Line (1): In late June prices made a high and then pulled back later to move up to the same high again in mid-July. At this point near $8.50, prices pulled back to approx. $8.10, an approx. 5% move lower on a reversal off the previous high which acted as a temporary upper resistance level.
  • Dotted Line (2): In early August prices made a new spike high and then pulled back. Notice that prices pulled back to the previous resistance level at "Dotted Line (1)". At this point, the previous dotted line (1) was now providing support and prices reversed and moved higher once again.

    In Late August, prices reached the same prior high set in early August and reversed. This price level was providing a strong resistance level now. After pulling back some, prices then made another attempt for a new high around mid-September, twice.

    Both times in mid-September prices failed again to make any new highs and reversed lower. Notice that prices reversed lower to the same dotted line (1) which had previously provided support.
  • Point's (6): Notice that each time prices tried to move up through dotted line (2) they reversed. Each time they failed, they formed consecutive tops. First a Double Top, then a Triple Top, and finally a rare Quadruple Top.

By looking over these area's so far, we have seen several identifiable support and resistance levels. Being aware of their potential beforehand can help identify potential trades.

Some example's: A) Once prices moved up through the resistance level (1) in late July, a new long position could have been entered for a Momentum trade. B) Once prices pulled back from dotted line (2) down to the previous support at dotted line (1) in mid-August, a new long position could have been entered for a Swing trade. c) Upon each failure to move up through prior resistance level, dotted line (2) in late August and again in mid-September, new short positions could have been entered for Swing trades.

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Without getting too (or should I say more) long winded for this one post, I'll move through the rest of the key levels a bit more quickly here:

  • Dotted Line (3): Has recently formed a Double Top, Point's (7) that has provided another Swing trading opportunity for shorting.
  • Diaganol Trend Line (4): At point (4) itself, a very nice Swing Trading opportunity existed by going long off the prior support level, dotted line (1).

    Along this same trend line towards the top, when prices finally broke down through this line a potential short trade existed again. Notice how prices now pulled back just below the previous resistance level, dotted line (2). The same pattern as in prior months.
  • Diaganol Trend Line (5): At the current point (5) itself, once again a potential Swing trade higher existed, with a target up towards the prior high.
  • Prices then moved higher and formed a Double Top in mid-November only to reverse from the prior high which was now upper resistance. Another potential Swing trade for shorting with a target of.... the same recent lower resistance level at dotted line (2).
  • 2 days ago prices reached this lower resistance level and have bounced higher again. This move again would have provided an opportunity for close to 8% profit in the last 2 days.

If this is the first time you are coming across this chart, there are several key support and resistance levels to watch for now. You already missed the good long entry point 2 days ago so you would wait now. If prices show signs of weakness over the next few days and break down lower through the lower support level, dotted line (2) at $10.00, this could be the sign of a trend reversal and potentially a good shorting opportunity if this stock met your research selection criteria.

If instead prices moved higher up near the prior upper resistance level, dotted line (3), you would wait for one of two signs: a breakout move higher or a sign of weakness at this level to signal a possible shorting opportunity.

As of right now, prices have closed basically flat after spiking higher this morning and this is while the market indices had a strong day and finished considerably higher. This is a holiday week though, so it is harder to make any quick decisions on one or two days price action.

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