Profit Using Technical Analysis - Resistance

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If excess supply (more sellers than buyers) comes back into the market, prices will start to go down.

When price retreats from the same level more than once, it’s considered a resistance zone.

Professional traders are always watching resistance zones as a point to exit trades.

Here’s a perfect example of resistance…


This is a chart of Chesapeake Energy (CHK).  CHK is in the business of oil and natural gas exploration and production.  The company operates primarily in the U.S.  CHK had a tough time as the natural gas market fell apart last year.  With a market cap of $15 billion and expected return to growth, some analysts think it’s poised to make a comeback.

But take a look at this…

The red line is an area of resistance.  This zone is around $25 and, as you can see, there are more sellers than buyers.  The excess supply drives the market lower each time it reaches the $25 area. Until CHK can break through that resistance, the upside is limited.

An important thing to remember…

Resistance zones are just that - zones.  It’s never a specific price. It’s more likely to be a zone “around” a price.  You’re looking for the zone where supply starts to outpace demand.

Just like support areas, confirming a resistance zone is necessary. When price rises into a suspected resistance zone, it must trade down from it at least once.  This is known as “testing” the resistance.  Once this happens, the resistance is confirmed.

If a resistance level is unconfirmed, it’s best to sit back and relax and let the market tell you what it’s going to do.

The second red circle from the left is the first “test” of the $25 resistance area.  This would be an opportunity for short term traders to take some profits.  More aggressive traders might consider buying puts, or even shorting CHK, each time the stock ventured into the $25 area.

Let’s find another current set up showing resistance.


This is a current chart of Boeing (BA).  If you’ve ever been to an airport, you’ve probably seen one of their planes.  They’re a leader in the commercial jetliner manufacturing business.  BA recently announced they were finally going to get their new 787 Dreamliner off the ground in late 2009.  The Dreamliner has been plagued with delays and missed deadlines for two years.

Investors loved the news.  They bought the stock right up to where we are now.  But as you can see, this $52.50 zone is an area of resistance.  The last time price was testing this level it dropped like a lead balloon.

The chart is telling me…

If you were a buyer from lower levels, it’s time to book some profits.
If you’re an aggressive trader, you can set up a short position at this level.  You could even buy puts.  Getting short anywhere above the $51 area would work nicely.  If BA breaks above the resistance, close the trade for a small loss.

If this resistance zone holds, we could see BA drop back down into the sub $40 area rather quickly.  That would be a sweet 20% return in a matter of weeks.  This is a good risk/reward setup.  We’ve got small risk for a high potential reward.

By watching support and resistance zones, you can get an edge trading the market.  These zones allow you to find low risk entries and help identify areas to take a profit.  Use it consistently and you’re on your way to big profits!

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