September 1, 2013:
Today we’re going to go over an important stock market trading strategy – learning how to invest by using support and resistance.
Many times a stock’s previous price provides areas of support and resistance to a stock’s price move. When a stock’s price is falling or correcting, frequently support is provided at a price level that was previously resistance. Resistance simply means that the stock could not get above a certain price. Let’s take a look at a chart of Facebook (FB) to illustrate this:
(Click to enlarge)
First, notice that in February 2013 Facebook was not able to rise above the price of around 32.50. It formed a double top (two attempts to break out higher) and then sold off. Then in late July 2013 Facebook announced much better than expected earning for the previous quarter. The stock gapped up on huge volume.
The interesting thing to note is that the price on the gap up day came down to touch the highest price the stock could reach back in January. In other words, the stock price resistance at the end of January became support for this gap up in price.
Always keep an eye out for support and resistance levels on a chart. Be sure to view the 50, 100, and 200 day moving averages on your charts. These moving averages frequently provide points of support and resistance and can be used to provide great purchase or sell areas.
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