Support and Resistance

One of the most used technical analysis tools is Support and Resistance. The S&P and many stocks have been hitting resistance over the past month and just about every trader can see these patterns forming on the charts.

The break above or the break below previous support and resistance levels can often trigger new buying or selling. These levels are more emotional than having to do with fundamentals. When a stock breaks up to new highs above a previous resistance area, everyone who owns that stock is a winner and has little reason to sell. New traders seeing a stock moving to new highs feel that the stocks prospects must be improving and jump onto the trend. The combination of these two emotions on the traders, lack of old selling and new buying can make for some big moves.

Recent action has many stocks hitting daily resistance while some have actually already broken to new highs. There are many trading methods that are used for stocks hitting resistance and making double tops, triple tops (or bottoms) that can be used to trade breakouts. As in all methods, there is no method that works all the time. The trader can either buy a breakout or fade a breakout. Fading a breakout means selling into the breakout and expecting it to be false and return either back into a sideways trend or peak and decline from that point as all the buyers that were going to buy a stock are done.

Turtle Trading and Turtle Soup Trading are almost opposite approaches. The Turtle trader is buying breakouts while the Turtle Soup trader sells them. They are both reasonable methods, but the usual caveat of stops in essential in both methods.