In an effort to improve utility of my thread and take this to higher level I will be posting links like following-
abcnews.com
and following too-
zdnet.com
PRO TRADER INTELLIGENCE REPORT
Support and Resistance
A ball hits the floor and bounces. It drops after it hits the ceiling. Support
and resistance are like a floor and a ceiling, with prices sandwiched between
them. Understanding support and resistance is essential for understanding price
trends and chart patterns. Rating their strength helps you decide whether the
trend is likely to continue or reverse.
Support - is a price level where buying is strong enough to interrupt or reverse
a downtrend. When a downtrend hits support, it bounces like a diver who hits the
bottom and pushes away from it. Support is represented on a chart by a
horizontal or near-horizontal line connecting several bottoms.
Resistance - is a price level where selling is strong enough to interrupt or
reverse an up-trend. When an up-trend hits resistance, it stops or tumbles down
like a man who hits his head on a branch while climbing a tree. resistance is
represented on a chart by a horizontal or near-horizontal line connecting
several tops.
Drawing support and Resistance lines - It is better to draw support and
resistance lines across the edges of congestion areas instead of extreme prices.
The edges show where masses of traders have changes their minds, while extreme
points reflect only panic among the weakest traders. Minor support or resistance
tends to pause, while major support or resistance causes them to reverse.
Traders buy at support and sell at resistance, making their effectiveness a
self-fulfilling prophecy.
Memories, Pain and Regret
Support and resistance exist because people have memories. Our memories prompt
us to buy and sell at certain levels. Buying and selling by crowds of traders
creates support and resistance. Support and resistance exist because masses of
traders feel pain and regret. Traders who hold losing positions feel intense
pain. Losers are determined to get out as soon as the market gives them another
chance. Traders who missed an opportunity feel regret and also wait for the
market to give them a second chance. Feelings of pain and regret are mild in
trading ranges where swings are small and losers don't get hurt too badly.
Breakouts from trading ranges create intense pain and regret. When the market
stays flat for a while, traders get used to buying at the lower edge of the
range and shorting at the upper edge. In up-trends, bears who sold short feel
pain and bulls feel regret that they did not buy more. Both feel determined to
buy if the market gives them a second chance. The pain of bears and regret of
bulls make them ready to buy, creating support during reactions in an up-trend.
Resistance is an area where bulls feel pain, bears feel regret, and both are
ready to sell. When prices break down from a trading range, bulls who bought
feel pain, feel trapped, and wait for a rally to let them get out even. Bears
regret that they have not shorted more and wait for a rally to give them a
second chance to sell short. Bulls' pain and bears' regret create resistance - a
ceiling above the market in downtrends. The strength of support and resistance
depends on the strength of feelings among the masses of traders.
Strength of Support and Resistance -
A congestion area that has been hit by several trends is like a cratered
battlefield. Its defenders have plenty of cover, and an attacking force is
likely to slow down. The longer prices stay in a congestion zone, the stronger
the emotional commitment of bulls and bears to that area. When prices approach
that zone from above, it serves as support. When prices rally to it from below,
it acts as resistance. A congestion area can reverse its role and serve as
either support or resistance. The strength of every support and resistance zone
depends on three factors: its length, its height, and the volume of the trading
that has taken place in it. You can visualize these factors as the length, the
width and the depth of a congestion zone. The longer the support or resistance
area - its length of time or number of hits it took - the stronger it is. The
taller the support zone, the stronger it is. The greater the volume of trading
in a support and resistance zone, the stronger it is.
Trading rules for Support and Resistance
Whenever the trend you are riding approaches support or resistance, tighten your
protective stop. A protective stop is an order to sell below the market when you
are long or to cover shorts above the market when you are short. This stop
protects you from getting badly hurt by an adverse market move. A trend reveals
its health by how it acts when it hits support or resistance. If it is strong
enough to penetrate that zone, it accelerates, and your tight stop is not
touched. If a trend bounces away from support or resistance, it reveals its
weakness. In that case, your tight stop salvages a good chunk of profits.
Support and resistance are more important on long-term charts than on short-term
charts. Weekly charts are more important than dailies. A good trader keeps an
eye on several time frames and defers to the longer one. If the weekly trend is
sailing through a clear zone, the fact that the daily trend is hitting
resistance is less important. When a weekly trend is hitting support or
resistance, you should be more inclined to act.
Support and resistance levels are useful for placing stop-loss and
protect-profit orders. The bottom of a congestion area is the bottom line of
support. If you buy and place your stop below that level, you give the up-trend
plenty of room. More cautious traders buy after an upside breakout and place a
stop in the middle of a congestion area. A true upside breakout should not be
followed by a pullback into the range, just as a rocket is not supposed to sink
back to its launching pad. Reverse the procedure in downtrends.
True and False Breakouts -
Markets spend more time in trading ranges than they do in trends. Most breakouts
from trading ranges are false breakouts, (false breakouts can typically be
avoided by making sure the breakout occurs on high volume.) They suck in
trend-followers just before prices return to the trading range. A false breakout
is the bane of amateurs, but professional traders love them. Professionals
expect prices to fluctuate without going very far most if the time. They wait
until an upside breakout stops reaching new highs or a downside breakout stops
making new lows. Then they pounce - they fade the breakout (trade against it)
and place a protective stop at the latest extreme point. It is a very tight
stop, and their risk is low, while there is a big profit potential from a
pullback into the congestion zone. The risk/reward ratio is so good that
professionals can afford to be wrong half the time and still come out ahead of
the game. The best time to buy an upside breakout on a daily chart is when your
analysis of the weekly chart suggests that a new up-trend is developing. True
breakouts are confirmed by heavy volume, while false breakouts tend to have
light volume. True breakouts are confirmed when technical indicators reach new
extreme highs or lows in the direction of the trend, while false breakouts are
often marked by divergence's between prices and indicators.
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