Combining Support and Resistance Lines
The
breaking of a support or resistance line provides an
initial indication that a new trend may arise. Here, an
example of using both diagonal and horizontal support
lines to analyze the market. A diagonal support line can
be drawn from the support points at 194 during the week
of April 23, and 196 on May 23. A horizontal resistance
line, which began in February at the 200 level, becomes
a support line on June 19 and 27. The diagonal and
horizontal support lines are slightly penetrated on July
5 for a potential sale, and decisively broken on July 9
below the 200 level. The market collapses and finds
initial support at the 191 level, which is a previous
support point from March 2.
A
trader might consider a sale near the 200 level on
July 5, with a protective buy stop in the 202-204
area. Why place a sell order at 200 and a buy stop
above the 202 area? The 200 area represents an
important break of a diagonal and horizontal support
area. The 203 level is a horizontal resistance level
which was clearly carved out in June. If the market
breaks through the 200 level, a decline should
occur, but if the market breaks 200 and retraces
above 203, a bull trend may ensue. Where should the
exact sale and concomitant buy stop be placed? The
determination of an exact entry and exit point in
any trade is an essential aspect of successful
trading, and will be addressed more thoroughly in
the money management section.
Combining Support and
Resistance Lines
