How You Can Profit Using Support And Resistance
The Dynamic Wealth Report
May 26, 2010
by Justin Bennett, Editor
The past month has brought a lot of fear and uncertainty back into the
markets. After the spectacular rise in stocks for the past year,
investors are now running for cover.
It’s a challenging time for investors. Every day brings new information,
which can push the market hundreds of points in either direction.
The European debt problems are front and center. Investors around the
world are wondering just how bad the problems really are. It raises
questions like…
Will the problems in Europe cause a global slowdown? Will it cause the
global economy to head back into recession… or worse? Will the debt
problems leak into other countries?
And if that weren’t enough…
North and South Korea are raising the war rhetoric. The North recently
sank a South Korean ship. Will this turn into a conflict affecting the
Asian markets? Could the uncertainty spill into U.S. markets?
Both of these issues are causing concern for investors…
It makes the investing waters very murky and unsettling. Investors just
don’t know how bad the storm is going to get. For some, the only option
is to go to cash. They want to sit out the stormy weather and wait for
the sun to rise again. Others are left wondering what the heck to do.
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Everybody has questions right now…
But the passing of time is the only way you will find out the answers. And waiting doesn’t give much relief when you’re sitting on the edge of
your seat.
How can you get a read on this market? Wouldn’t it be nice to have an
idea of what the markets may do next?
Well, by using technical analysis, you can get a good idea of where
markets may be heading.
By plotting support and resistance levels, you can get a read on where
the markets may turn, where stocks may start to go up again, and where
they may start to weaken.
These levels can help you make important trading decisions. It gives you
a line in the sand where you can say, “I'm going to sell if the market
crosses this point.”
It allows you to control risk…
And controlling risk in your portfolio should be at the top of every
traders list.
If you can’t control risk, it doesn’t matter how big your winners are. If your losers turn out to be bigger than your winners,
you’re sunk.
Also, what’s the point of having a big winner if you can’t take profits?
Using support and resistance lines can give an investor an idea of where
to take profits.
Is technical analysis always right? No… but it puts the odds in your
favor. And putting the odds in your favor is better than getting pushed
around at the mercy of the market.
So let’s take a look at the S&P 500…
The S&P 500 index is a great representation of the broad market. Plotting support and resistance lines in this chart can give you an idea
of where the markets are heading.
As you can see, the fear and uncertainty has sent the markets tumbling
in recent weeks. Now the S&P 500 is trading at an important technical
area. The green line on the chart is the 1060 level. This corresponds to
the 10,000 area in the Dow.
So what clues can we get from plotting these technical levels?
First of all, the markets have broken below the long-term trend line
(blue line). This means the spectacular market uptrend of the past year
is
over.
We can also see the red line at the 1150 area is now resistance. This
level coincides with the highs of January 2010. You can use this as a
point to
sell if the markets bounce back up to this level.
The green support line is where the markets are trading right now. You
should use this as a
low risk buy point.
Why is it low risk? If the market breaks below this level, you can close
the trade for a small loss. But if the markets go higher off this level,
you can pull in some nice profits.
So what do you do next?
Watch what the market does around these important levels. Use them to
help you make decisions.
Investors have lots of questions right now… using technical analysis can
bring some clarity to a fuzzy market.
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