Support and Resistance Basics A Comprehensive Guide to Setting Targets and Navigate the Markets with Confidence

Support & Resistance

We talked about entry and stop loss points when covering candlestick patterns, but we haven’t yet looked into the target price. Let’s get that out of the way in this chapter.

The target price can be identified through the use of support and resistance points. These points represent certain prices where there is expected to be an increase in buying or selling activity. Support refers to a price where buyers are more numerous, while resistance occurs when sellers dominate.

Traders can also utilise support and resistance levels to locate optimal entry points when trading independently.

The Resistance

Resistance can be seen as a cap that restricts prices from growing further; it’s a price point on the chart in which traders anticipate ample supply to be created if reached. This level is always situated at a higher rate than the current market cost.

The probability of the price reaching the resistance point, levelling out briefly as it absorbs all supply and then declining is high. This technical scrutinisation tool is especially important for those trading in a bull market – resistance is often the catalyst for selling.

Let us take a moment to envision L&T at Rs. 206 forming a bullish marubuzo. This is considering a low of 202. This pattern alerts us to start a long trade, for which the stoploss is 202. Furthermore, our newfound knowledge on resistance reveals that we can set 215 as a potential target for this trade!

You may be curious as to why 215. The answer is easy:

1. It appears probable that there is an abundance of supply due to the 215 resistance.

2. Too much supply creates downward pressure on prices.

3. Selling activity has a tendency to drive prices down.

Once the resistance has been identified, we can put together a comprehensive plan for our long trade. 

An entry at 206 with a stop-loss order placed at 202 and a target of 215.

The next logical step would be determining the resistance level. Identifying potential support or resistance is quite straightforward. Whether it’s a support or a resistance depends on where the current market price stands in relation to the identified point: below, it constitutes a resistance, while the above suggests a support.

Let’s move on to understanding ‘support’, and then we will look at the steps to identify S&R.

The Support

Gaining knowledge of resistance and grasping what the support level is should appear straightforward. As the name implies, support impedes the cost from going lower. The support level can be seen on a chart as a price where there could be a maximum number of buyers. Whenever the price reaches this line, there is usually a rebound. The support level is always beneath the current market value.

The likelihood is high that the price could continue to drop until it reaches the support level. This is a key technical point for investors to look out for in a bearish market, as it often acts as a sign to start buying.

Zensar Technologies Limited displays a support level of 435.

Be sure to take note of several aspects on the chart shown above.

1. The support level, as indicated by the horizontal line, lies below the current market price.

2. At present, the price level is 442.5, with the support at 435. Pointing out the current candle for your convenience, it is encircled.

Let us consider a bearish pattern, which in this case may be exemplified as a shooting star at 442 with its high as 446. Taking this into account, the signal to enter is too short Cipla at 442 with 446 as stop loss and 435 as the target level since it is regarded as the immediate support.

This target of Rs.435 is backed by several reasons which make it worthy. These include:

1. Support above 435 suggests the possibility of additional demand, signalling that market demand may outpace supply.

2. Increased demand leads to an uptick in prices.

3. Buying can increase the price, as demand pushes it up.

Therefore, when someone holds a short position, they should utilise support levels to establish limit orders and exit points for the trade.

Having identified the support, the short trade has been formed.

Entry point – 442, cut loss – 446, and objective – 435.