The Hindu Business Line : Trader's Corner

The first question that pops to the mind when that much-fancied stock, that was touted to treble in a month, suddenly jumps off a cliff is - where is the next support? Similarly, most of us would like to know how far the profit can run by studying the resistance levels in the chart. These methods are of course employed by more conservative individuals who do not wish to heed to disembodied prophesies swirling around in the market on where the various stock prices are heading.

Supports and resistances can be identified through a number of fairly simple methods.

The easiest way to identify them would be by just perusing a plain bar or candlestick graph. All graphs contain innumerable peaks and troughs. The troughs would be the supports and the peaks would be the resistances. The question that is frequently asked by beginners is: which peaks or trough would be the most relevant at any given point?

The answer would depend on where the security’s price is positioned. Once the price starts falling, look at the nearest trough to the left. That would be the immediate support. Once this trough is breached, the next lower trough to the left can be considered as the support.

Similarly, once the stock price begins moving higher, the immediate resistance would be the nearest and the most recent peak. If this is surpassed, the next peak at a higher level would be the resistance.

Troughs and peaks that are followed by major price moves are considered more significant that those that usher in a minor price move. For example, the Sensex peaked at 12671 in May 2006 and it was followed by a 30 per cent correction. So this level will be a significant support in the event of a fall in the index.

Similarly, supports and resistances that are unchallenged for a greater time-span would be more important than those that are surpassed very soon. — Lokeshwarri S. K.

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