Profit Using Technical Analysis - Support

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Two forces make market prices go up and down.  They’re called supply and demand.  When a market rises, it means there’s excess demand (more buyers than sellers).  When a market falls, it means there’s excess supply (more sellers than buyers).

A stock price stops falling because supply has come into balance with demand.

Once we see excess demand come back into the market, prices will rise again.

A price level where excess supply turns into excess demand is called a support zone.  A support zone can easily be found on a chart.

Here’s an example…


This is a chart for Murphy Oil (MUR).  MUR operates in the oil and gas exploration and production business.  It’s an international company with over $27 billion in annual sales for 2008.

The green line at the bottom of the chart shows you the support zone.  The green circles are where excess supply (falling prices) turned into excess demand (rising prices).

It’s important to note, support zones are just that - zones.  It’s never a specific price.  It’s more likely to be a zone “around” a price.  We want to recognize the zone where demand starts to outpace supply.  In the case of MUR, the support zone is “around” $44.  Notice how the market kept finding this support zone and bouncing up.

This brings up an important point.

Support levels must be confirmed.  This means price must “test” a suspected support zone before actually considering it to be support.  A “test and hold” means price must trade at a support level and hold it.  The second green circle from the left is the first “test and hold” of the $44 price support zone.

If a suspected support zone hasn’t been confirmed, it’s best to step aside.  Let the market tell you what it’s going to do.

Clearly you can see buying at the support level offers big potential for profits!

Now that you know what support looks like, let’s look at a current support setup.


This is the Market Vectors Gold Miner’s ETF (GDX).  GDX tracks the movement of various gold stocks.  The main holdings are Barrick Gold, Goldcorp, and Newmont Mining.  Why is gold popular?  Inflation is in the news and tends to drive gold prices higher.  Some investors will use GDX to profit from inflation fears.

GDX is a good example of support on an upslope.  Today the GDX is trading at $39.50, just above the up-sloping support line.  Looking at the chart, buying GDX in the $38 to $40 area appears to be a good low risk entry point.  GDX could run up to the $45 level which might be a good point to take profits.

If GDX breaks below the $35 area, the support line would be broken.  You would exit your trade to conserve capital.  Remember, good traders will always control their downside risk.

As you can see, using support is an important part of trading.  Watch these levels to find good low risk entry points.  It’s sure to magnify your profits.

Ignore support levels and you’ll be the one driving the 20 year old Corolla!

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