Stocks & Commodities V. 29:13 (12-16): Anchoring Support And Resistance by L.A. Little

Anchoring Support And Resistance by L.A. Little

Here’s how you can use support/resistance lines, swing points, and volume to anchor support and resistance zones.

What does a horizontal support or resistance line mean to you? What gives it significance? Traditionally, the thought is that the number of highs or lows that happen to reside on the line is what gives the line strength. Coupled with that is the length of the line, so the longer the better.

HOW STRONG ARE THE LINES?

Figure 1 is a chart of the Semiconductor Holdrs Trust (SMH) for a one-year period. I’ve penciled in two lines, the higher of which is resistance. That line has six “touches,” but that depends on the thickness of your pencil lead. That is a lot of touches, and the length of the line is respectable, for it’s been in place for five months. But given these two measures, how can you assign a measure to the strength of the resistance line and have confidence in it? What if it were one year in length with double the touches? Does that make it twice as strong?

Unlike the resistance line, the value of the annotated support line is unclear. It looked like support for the first four months of its existence with four or five touches, but in late August, prices took a serious dip below the line, rendering it essentially useless. Using the same valuation measures, if you didn’t know that the line would be violated in late August, wouldn’t the support line have been almost as strong as the resistance line above? It existed for almost the same duration and contained almost as many touches.

What’s even worse is that the support line did turn out to be support in the end. Yes, prices dipped below the line, but they subsequently turned and traveled higher in a beeline fashion.