Construction/Drawing of the Support and Resistance level
Here’s how you can identify and construct the support and the resistance line:
Step 1- If you’re attempting to pinpoint short-term support and resistance, a minimum of three to six months of data should be loaded; if your goal is to find long-term S&R, then opt for twelve to eighteen months’ worth. With such an abundance of points on the chart, it will appear somewhat constricted or ‘squeezed.’
This chart displays the information from 12 months of data points. The data points have been plotted on this chart.
Step 2- Identify three key price action zones on the chart. These “sticky points” show a price pattern
This set of charts outlines three things in succession:
The chart below shows that after a brief up move, prices appear to hesitate and remain static. The encircled points signify this moment of inactivity.
The chart shows the encircled points representing a stagnant price following an initial decline.
The encircled points on the chart point to sudden price changes.
Step 3) Spot the price action zones – Take a look at a 12-month chart, and it is possible to identify multiple price action zones. Aim to find at least 3 of them that are located at the same rate.
Here is a chart that identifies two different price action zones, which are not at the same level.
Examining the chart, I’ve highlighted three areas that are around the same cost levels.
It is essential to ensure price action zones are placed at a length apart for identifying support and resistance. For instance, if one is determined on the 2nd week in May, then it would be more valid to identify the next one no earlier than 4 weeks later. The further apart these areas are, the stronger the representation of S&R levels will be.
Step 4) Draw a horizontal line – Connect the three price action zones with a straight line. The location of this line in relation to the present market price will determine whether it is viewed as support or resistance.
Take a glance at the chart
Beginning from the left,
The graph above presents the 4 price action areas, which are relatively near to one another, with 429 being the lowest. This figure is lower than the current Cipla market price of 442.5, thereby making it an immediate support zone.
Be aware that if you use Technical Analysis to identify support and resistance, there is a possibility of an incorrect estimation. It is important to take into account that prices are generally reflected in a range and not just one price point. In other words, it can be seen as a zone or region that serves as either support or resistance.
Based on the above logic, a reasonable support region for Cipla’s stock price would be between 426 and 432. I arrived at this range by adding and subtracting 3 points from 429.
This graph presents the S&R of Ambuja Cements Limited.
Currently, Ambuja is trading at 204.1, with support at 201 (below current market price) and resistance at 214 (above current market price). For traders who are shorting the stock at this price, they may want to look for a target of 201, which is based on the identified support level. Meanwhile those who are looking to go long can consider a target of 214 derived from the resistance point. This could be a good intraday trade opportunity.
We can identify at least 3 distinct price action zones in both the support and resistance levels, spaced out over time.