I start with these concepts because they need to be understood in order to use the day trading levels that I post each day. The following topics involve looking a chart of price history of a given financial instrument.
Support Levels are price points at which prices have had a hard time pushing down through in the past. In other words, a support level is a level where price stopped falling. Often a support can be found at slightly different levels, for example yesterday prices moved down to $90 in the morning, later in the day they went down to 89.90 before moving higher, then near the end of the day price touches 89.95 and then moves back up to close at 91.
In this example three support levels were created, but together they can be used to describe a support area. Support areas have more significance than a single level because it shows the market has tried several times to breakthrough a certain level, but could not sustain it. In this case the support area would be 89.90-90.00.
Resistance Levels on the other hand are price point in which prices have had a hard time pushing up through in the past. In other words, a resistance level is where prices stopped rising. Just as the example under the support levels section, resistance can also form resistance areas.
Resistance and support levels are dynamic, meaning prices may just edge past the old support resistance level only to revert course. This new price is a new resistance or support level, but should be coupled with old support and resistance levels in the same are to create a support or resistance area.
Breakouts are price movements in which a support or resistance level is moved through. For instance, if the SPY has moved up to $100, but can not break above that price, $100 is a resistance level. When the price finally does move above $100 it would be considered a breakout. When price move up to resistance or support levels, but do not breakthrough, it is called a test (or a level was tested).
If prices quickly move back the other way through the support and resistance zone it just broke out of, then it is called a false breakout. In the example from above, if the SPY moved above $100, this would be a breakout, but if it fell back below $100 and could not get back up to $100, then this would be a false breakout.
By using support and resistance areas (when available), instead of just a single level, we have a better chance of picking levels to watch that have more significance. The more times a price has been tested, but not moved through significantly, the more important that price area is. If a breakout occurs above the top of a resistance area, or the bottom of a support area, it is more likely a significant breakout could occur. But as mentioned, these areas are dynamic and may expand.
Support and resistance occur on all time frames. These levels can be seen on a one minute chart which may only show one day of activity or a weekly chart which could show many years worth of data. If multiple time frames show resistance at a certain level, that level is likely very significant, for all traders. Even a day trader can benefit if a breakout occurs on a weekly chart. They may not be aware of that level because generally they are only watching the last few days or a week of price action. A longer term trader may not be aware of why a major move occurred intra-day, but it could be because of technical factors in a shorter time frame when they were only watching their long term charts.
Not all time frames need to be analyzed, but it is a good idea for all traders to look at time frames longer than the one they currently trade on to be aware of larger forces that may be at work. If longer term traders are looking to enter or exit and they want a good price it may be worth looking at shorter time frame charts.
By: Cory A. Mitchell
