This post is really aimed at the newbie to charting, though perhaps more experienced traders may enjoy reading this post.

I have always been fascinated when I first started charting at how a price could rise or fall to a certain value and change direction...not only change direction but also fall or rise to that same level and repeat the process all over again..multiple times...I was introduced to the concept of Resistance/Support.

Consider the following graphics which have the look of Point & Figure charts (more about that soon.)



these are simplistic examples of resistance/supports

Chart A is a horizontal resistance/support chart. Note how it rises to that red line then falls back to the green. Think of it being in a two story house. You want to get to the second story and you climb to the top of the stairs only to find the door locked...the ceiling of that first floor is a resistance to your ability to reach that second floor....so you trudge back down to the floor and some time later climb the stairs again to try the door to the second floor....locked still. So you go up and down those stairs until one time the door is open and now you are on the story floor which is the first story ceiling.

now you can walk on a solid floor until you take the stairs back down to the first story floor.

Always remember that: ceilings become floors when rising through them and floors become ceilings when you fall below their level

Said another way as a stock passes through a resistance, that resistance now becomes a support

the more difficult it is to pass a resistance...the stronger the support that line becomes as the stock rises further.

Just drawing lines helps a lot....however, understanding the battle that goes on between buyer and seller makes these trend lines more meaningful.

Let us consider a grocer and the customers he has buying his tomatoes.

This grocer buys his tomatoes in bulk...beautiful, ripe, red tomatoes...So he posts what he thinks is a good price (P1) and puts them out for sale... his customers love then and he realizes he can get more money for his product...also he has less product to sell so he raise his price to (P2)...they still sell well so he raises the price to (P3) and then (P4) when suddenly the tomatoes are priced too high for his customers and sales stall there (it hits a resistance).

Now tomatoes have a shelf life...he must sell then before they lose quality..so he lowers his price to (P3)...customers come back...lowering the price further gets more customers back....tomatoes are finally back to (P1) before the seller (the grocer) digs in his heels and says "I cannot lower my prices any further or I will lose money" (the support).

This up and down movement continues for weeks as he buys and sells more tomatoes. He won't sell for less than (P1) and the customer refuses to pay more than (P4).

Then one day just after he buys his bulk buy of tomatoes and he raises his price again to (P4) he realizes...all the other stores (his competition) are sold out of tomatoes...his tomatoes are now worth more and he can get even higher prices...he has finally broken that price resistance level and sells even more as people realize he is the only game in town...he steadily raises his price to a new high (P6) and when the price falls to (P4) the seller digs in his heels and refuses to lower his price further...afterall you want tomatoes...he is the only seller around so (P4) is the support price now and (P6) is the new resistance price now.

Sometimes it is easier to think in terms of tomatoes to understand this concept.

Now consider Chart B this is a diagonal resistance/support pairing....Who is winning the tomatoe battle?

The buyer is winning....the maximum he will pay is falling with time and the seller is dropping his price lower on each cycle....this is a bear resistance/support channel if the channel had a positive slope it would be bull resistance/support....this regular pattern if it breaks outside these lines will result in a significant movement but in the case of chart B...one would EXPECT the breakout to be to the downside simply because the seller is taking more and more of a beating....however, there is no reason that the price could not break out to the upside and go through the resistance....nothing is guaranteed so the critical times to watch such a formation is when the stock rises to the resistance or falls to the support....in between these lines is not as important.

Consider Chart C Is this bullish or bearish????

Well think tomatoes again....the buyer is beating the grocer's price steadily paying a less maximum with each cycle. The grocer is successfully maintaining his bottom line. However, this cannot go on forever...eventually the maximum buyer's price and minimum grocer's price will be the same....someone will have to "blink".

This is traditionally a bearish formation (a descending triangle)....when you hit the apex of that triangle usually the the price falls dramatically DOWN...conversely when the buyer holds his maximum price steady and the seller raises his bottom line price (ascending triangle) this is bullish as the buyer will "blink" and accept a higher price eventually

So you see....it is not necessary to memorize patterns...too many charting books (candlestick books are bad for this) want the chartist to memorize patterns and that is not necessary if you recognize the battle between buyer and seller.

USING Resistance/Support trend lines

Well that is the theory behind the formation of R/S lines....now let us look at applications of them

I really like to use Point and Figure (P&F) charts for determining MACRO resistance/support lines...ie: long term not day trading. I can see supports and resistance points over years...no a few minutes this way.

There is a lot to the formation of a P&F chart...they are considered old school (over 100years old) but nothing has changed, they still are a valid chart and one, as I said, usefulll for establishing goals and Resistance/support trends.

Let us look at a chart for TD Bank



A TIP: I don't always print my charts out...I can usually see the formations easily enough....sometime I will take a clear plastic 6" ruler and put it on my monitor screen to "plot" a line.

Ok let's start at the bottom at line (1)

it starts as a resistance line...why because at the time, it was the highest price from Sept/2011 to Jan 2012. See the result after breaking that resistance....that line became a support for thereafter... remember : ceilings become floors as you rise above them. the bottoms of the "O" columns in the red 2 and in the red 6...show the strength of that support.

Line (2), (3) AND (4) make an interesting combination

Line (3) is a nice ascending diagonal support...Line (2) was a "Berlin Wall" of resistance for almost a year!!! In December that wall crumbled and line 4 became the new resistance...normally line 2 would be a great support but that was not the case...line (3) continued to be the diagonal support for almost 7 months.

Then the dam broke....when you have a fight to pass such levels the result of breaching the resistance is usually dramatic...and it was here for sure.

Now when it rose to $46.75 and pulled back that could be a sign the rise was over...it established a resistance point and support at $45.25...things looked more promising when you get a support line (not shown by the double "O"'s at $47.00

then resistance at line 5 turned into a support and Line 7 formed a new resistance with diagonal line 6 as a support. We had a diagonal channel with lines 8 & 9....and the beat goes on.

I bought this stock when the price first crossed $46.78...looked like I made a mistake but the diagonal support line 6 held and now I cannot say how long I will keep this stock but my current support line is $55.25 (line 10)

I might change my mind as time goes on but right now it is headed into the unknown.

Can we use these R/S lines in line charts daily or by the minute....of course!!!! this are what I call Micro R/S lines because they don't last long.

But this is enough to digest in one post....I will continue this in another post soon....Hope you found this usefull!!??

Here is the missing graphic from the previous post....Perhaps the size of the post had something to do with it.....I don't know....but now the first half of the text will make sense (unless this one disappears too {sigh})

Ok ... I hopefully explained basically how these trend lines are formed and how to use them in a P&F chart .... now I can move on to showing how to use them in P&F and other charts.

Basically I use a P&F chart at times when I want a longer term look at a stock's performance. The resistance and support levels jump out at me.

consider Lundin Mines [TSX:LUN]

(A)



Note: that I have made a rather thick line here....if you are rising the tops of "X" columns and bottoms of "O" columns to the left are resistance points...don't be afraid to make thicker lines when you see a small variation....you are mapping out a ZONE of resistance or support. Here the zone ranges from $5.40 to $5.50.

Here is the corresponding 3 year line chart

(B)



the same line is there too but I think you would agree it is easier to see in the P&F chart

But I do use resistance support lines in various charts....you may have followed my GOLD commodity spot price charts.

(C)



now this is a one year gold chart with emphasis one what is happening NOW. The Solid red and green lines are secondary support and resistance lines. From my point of view I would not get really excited about the price of gold....no matter how fast it rose unless it breached solid red resistance line...Similarly I would not get pessimistic about the price of gold unless it fell below the solid green line

(Do you see the support line that runs horizontally at about $1200/oz...if gold falls through that tertiary support line then the pundits of $1000/oz gold might actually be right)

the dotted red green blue lines are the current support/resistance lines ..... very exciting

The dotted blue line AND the dotted green lines are both supports....the dotted red is the resistance line.

See how the price of gold is oscillating downward within the red/blue dotted envelope....see how the horizontal dotted green line is now more significant....there will be a major movement in the price of gold. Remember the buyer/seller scenario I mentioned in the last post.....the buyers are beating the price down lower and lower...the sellers are falling back......things can change but so far it looks like another really bearish correction coming suddenly to me.

Using trend lines to judge an entry or exit price

I do this all the time let us look at the TD Bank for the last 10 days in a 15 minute timeframe

(D)



first look at the dotted R/S lines on the left....see how when the price rises suddenly above the support it becomes a BUY SIGNAL....remember the Buyer/seller battle...that was a bullish scenario that went true to form...the buyers blinked and accepted the sellers high price.

But look at the solid blue/green support and red resistance lines. The channel is ascending like the other....but instead of converging like the dotted lines...the lines are diverging which mean the swings get wilder and wilder.

Eventually the price breaks the green support line and forcefully so....that is your SELL sign.

As you know, I have this stock in my portfolio so I might wonder if this is just an intra-day correction and perhaps at least a hold...or depending on your tolerance for risk maybe an opportunity for a buy back (if I sold) or buy-on the dip action

So I quickly look for a possible support level...I find a resistance line at $56.80 horizontal...will it serve as a support now???? and the answer is YES....

If it had broken that line and I was aware of it (I don't look at charts 24/7) then this would be a hold but I would consider selling if it broke that line significantly.

Frankly, I have several other charts to consult before I make that decision but you can see using trend lines alerts you to potential problems.

can I use this charting tool for an intraday play....I don't do such plays but if I did , I might do something like this IF ALL I HAD TO WORK WITH WAS Resistance/Support lines .... in reality I have many more tools but later on that....

Let us say I have been following DHX since yesterday



I see the previous day that the price has risen above the resistance which has been there for most of the day and buy it at $8.70/share...I might be nervous when it fell immediately but the resistance became a support and the price continued to rise....as the rest of the day continues I revise my support/resistance lines and I hold it over night (yeah yeah I know you would not do that as a day trader but it would spoil the story to sell then )

the next day my faith in my lines is supported and the stock price takes off.....I keep revising my support/resistance lines until there is a definite breach of the support line....then I sell at about $9.20 ....that little 2 hour total play would have netted me about $0.50/share or about 5%

In reality though I would be monitoring with other indicators and overlays as you will see later....BUT if all I had to work with ere resistance and support lines....I would at least make a decent decision.

Bollinger bands is the next topic....that will take at least 2 posts....

Sorry sorry sorry...it is happening again....the graphics are there when I make the post but disappear later. I don't understand what I am doing wrong....here are the charts in the order they should appear

(A)





(B)





(C)





(D)





Again sorry, I will work faster...that might be an issue too as these graphics may have a time stamp if the post is not saved fast....a mystery to me right now

Edit: I added letters to both posts to show where these graphs should have been.

Most likely you are accidentally clicking 'remove' instead of 'embed' in the popup window. This removes it from the server.

Mike

Big Mike 

Most likely you are accidentally clicking 'remove' instead of 'embed' in the popup window. This removes it from the server. Mike

no I don't think I am doing that since the charts are in their proper place and I view them in the final post before I leave...It is only when I shut down the computer and come back an hour or so later that they are rendered as an invalid image.

I have been composing these posts within this text box and it can take 30 mins or more...It is my feeling that all but the last image is timed out somehow...that is the only thing I can say....as you can see....I am NOT a newbie at using charts in my posts...but most messages were composed and posted in 10 mins or less....these last 2 big ones take more thought....hence time.

Underexposed 

no I don't think I am doing that since the charts are in their proper place and I view them in the final post before I leave...It is only when I shut down the computer and come back an hour or so later that they are rendered as an invalid image. I have been composing these posts within this text box and it can take 30 mins or more...It is my feeling that all but the last image is timed out somehow...that is the only thing I can say....as you can see....I am NOT a newbie at using charts in my posts...but most messages were composed and posted in 10 mins or less....these last 2 big ones take more thought....hence time.

There is no timeout. You could upload something in the post today, and come back in 1 month and press submit and it would work.

Are you using the Standard Editor? UserCP -> Edit options -> Message editor. You should be.

Are you using preview? If you are using preview, then the images will be cached to your local browser upon preview. If you accidentally delete the image from the server after, it will still show on your browser because it is cached.

Mike

Big Mike 

There is no timeout. You could upload something in the post today, and come back in 1 month and press submit and it would work. Are you using the Standard Editor? UserCP -> Edit options -> Message editor. You should be. Are you using preview? If you are using preview, then the images will be cached to your local browser upon preview. If you accidentally delete the image from the server after, it will still show on your browser because it is cached. Mike

I copied this from the last post without "IMG" "/IMG" wrapped around it (I used quotes to avoid an Invalid Image

https://nexusfi.com/attachment.php?attachmentid=152228

this will say the graphic does not exist.

I don't use any special editor...I enter the text and graphics into the window that I am currently typing into...I enter the graphics in the usual way using "Manage Attachments"....I have noticed once in a while in the past that if I partially created a post and entered graphics through "Manage Attachments" and walked away from my machine for a while because of an interruption without saving the message the up-loaded graphics which are embedded into the document disappear from Manage Attachments....that is why I suggest there is some kind of timing involved.

It is a mystery to me Mike.... in future for long posts I think I will compose the message in NotePad...copy and past it into the window....then up-load the graphics and embed them in the appropriate places....it will be much faster that way.

All I can think of to do.

oh yeah....under Edit options I have the default (at least I chose nothing it was pre-set) Standard Editor - Extra Formatting Controls

The method in which you type the post (notepad, word, Firefox, Chrome) should make no difference, I would recommend you just use your browser and not some third party app like Word or etc that will just introduce formatting problems. Modern browsers have spell check built-in.

As for the walking away and images disappearing, there is no reason that should happen and I don't think that is it. Feel free to prove me wrong, but there is no setting where any attachment "times out" or expires after being uploaded to the server.

I'm not aware of any error or problem or bug on the server side. Not to say it isn't possible, but we have over 250K attachments on the forum and this problem happens way less than 1% of the time. I've chalked it up to human error, accidentally hitting remove instead of embed, as they are next to each other.

Mike

Big Mike 

The method in which you type the post (notepad, word, Firefox, Chrome) should make no difference, I would recommend you just use your browser and not some third party app like Word or etc that will just introduce formatting problems. Modern browsers have spell check built-in. As for the walking away and images disappearing, there is no reason that should happen and I don't think that is it. Feel free to prove me wrong, but there is no setting where any attachment "times out" or expires after being uploaded to the server. I'm not aware of any error or problem or bug on the server side. Not to say it isn't possible, but we have over 250K attachments on the forum and this problem happens way less than 1% of the time. I've chalked it up to human error, accidentally hitting remove instead of embed, as they are next to each other. Mike

okay...let us say I start a message...upload a chart using Attachment Manager...I will take a screen shot to show it is uploaded.... I will also take a screen shot to show that the graphic is properly embedded into the in the message. The screen shots will include a time stamp from my computer.

Then I will wait for 30 mins and see if the image remains in Manage Attachments and take another screen shot

will that be proof??? It is all I can think of to do.

Jim