Ep 187: 4 Key Points to Spotting When a Stock is Coming Into Resistance

June 7th, 2018

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I want to cover a handful of different charts for you and discuss a little bit more about resistance.

What resistance mean? We've had a lot of bounces in the past after major sell-off. You get a nice big pop and bounce.

How do I look at resistance? What should you be thinking about as stocks get into resistance? Just the overall concept of a stock stalling out.

Why is it important to look at charts for resistance?

Resistance is a place where problems occur. There's always turmoil that happens in the marketplace; there are the Bulls and the Bears that are fighting.

It's kind of like a chess game that's always going back and forth, and sometimes a piece gets taken off-white, and other times the piece receives taken off black. There's this back-and-forth that happens.

Naturally speaking, the tendency of a human being after they're born, they grow up, age, and eventually die. That's the natural cycle and tendencies.

If we look at stocks, the natural tendency of stock does they inflate. Prices keep inflating. The gas used to be 59 cents a gallon to $1.20 to $3 a gallon.

It continues to inflate with time because the value of money remains to kind of rise up in a way that you have to pay more for things and goods. This is what inflation does. It's just the natural tendency of money because it just becomes worth kind of less and less over time.

It's a fiat currency. You can't do much with it besides burn it and make fire.

When it comes to the stock market, the natural tendency of stock prices is to go up. This is why the typical buy-and-hold approach works.

When you want a peace of mind, buy some dividend stocks. Let them sit and in a way forget them and accumulate things.

It's in the problem areas where you take some profits. This is why it's good to look at resistance. It comes down to where things are struggling, where things are stalling.

For example, you get to your college years; you start struggling a little more with your tests. Maybe you get into your elder retirement years, and you struggle a little more financially. With stocks, it's no different.

As a car gets into a particular area with its speed, it struggles to go beyond that level.

With stocks, we get the same kind of concept. They've pushed that gas pedal so fast that eventually, it runs out of gas just like any machine would.

You need people to constantly be buying things for a stock price to keep going higher.

If we take a look at Apple, notice that we've had this sell-off from mid-April.

We had a major rise up from 160 to 170, 170 to 180, 180 to 190 and then the stock stalls out.

We had resistance at 190.

Now we got the next little flood of gas. Another little push to 193, 194, 195 level. But again it's stalling out a little bit.

When you push the gas hard, eventually things will stall out. The further you push that gas pedal, the more you should be taking off profits in the strength.

Now, this is a daily chart from May to June. Within just about 11 to 12 days, we went up 17% in Apple stock. That's amazing and remarkable.

If you can do that, you should be taking some off from the strength as you get into some digestion, even if it's half. Eventually, add that half back in sometime in the future.

That's the way you think about it. As we get into resistance levels, it's a good time that takes them off because eventually, stocks will come back.

Take a look at our sideways pattern from January to May. We got into this level of resistance, we got into these higher prices, around March in Apple. When you get into this higher price level, you start creating a little bit of turmoil. This is where you take some profits.

Eventually, you got that pull back to that 165 level. This is where you could add some.

Again, we get back into it, resistance - takes them off, come back into support and you can add some for that stock to continue moving higher.

You don't know that it's always going to go ahead and reject that resistance. Sometimes it breaks through like we did here in May and it continued to move higher.

That's entirely okay then you wait for the next pullback.

You can do this on a daily timeframe. You could do it more on a weekly timetable.

It just comes down on your perspective. Your time horizon. How long you're looking to invest in.

Overall resistance is a place to take some profits because this is where stocks start rejecting and pulling back. It's a good time to cover this because there's a lot of stocks right now that are in resistance, especially today.

You could see at the 1700 level on Amazon we're hitting some resistance. This could be just minor resistance, but it's resistance.

Many of these stocks, when you take a look at them, they are at some critical points where you could get a pretty significant pullback.

You might only get a single pullback, but you have to wait to see if this accelerates to know if it's going to be a small pullback or a major pullback.

The more times it kind of hits resistance, the more chance or probabilities that it will break to the upside or reject it nastily.

Often, when it hangs and lingers at those highs or the tops for a while, chances are it'll break through.

But right now as you're noticing a few of these stocks, they're right at resistance. You can see with a handful of these stocks, they're all at a consolidation area, and they're coming into resistance.

How do you spot this resistance? How do you know it's going to happen?

Three simple ways to recognize resistance:

  1. Look at some sideways action and look at some high swings where they got rejected in the past. - as we approach those, you're kind of aware and prepare for that as well.
  2. Look at the whole numbers.
  3. Being stretched from an oversold situation. Here we are oversold. We counter-trend bounce. We had a major bounce, and now you're starting to reject things.

Those are three simple ways. Of course, there are many other ways, but this is a way to see where resistance is and where it is coming from.

The first one is looking at the past a swing points where it rejected. Then, looking at some whole numbers. Looking at how far and elevated that move is from there.

For some of the advanced people - those that have been with me for a while - you're looking at a reduction of volume.

As volume starts to dry up, that also begins to put pressure on stocks because you're reducing gas on the gas pedal.

You can see right here why we're getting a 2% pullback in Facebook. But then, when you look at it, if you get another day that's significant down date, you could take out about a month's worth of gains in one or two days. Imagine that.

That's definitely where things get a little scarier.

You can see here Google. 1150, nice whole number. You can also draw this across our swing point, that we've talked about. You look at the steepness or that angle, how fast it moved. Now that we have rejection, you can see there what's happening and what's going on. That's really what you're looking at.

As far as identifying some resistance levels, let's take a look at Johnson & Johnson.

We got into a swing point. We got into it. We even broke above it so you could see sometimes you get a break above it. As I always like to say, does your friend always show up at 6 o'clock for dinner? Not necessarily. Sometimes it's 5:55, sometimes it's 6:03. It's not till 6 o'clock on the dot.

If some stocks break a little higher, they fake you out, and then they get that massive lower movement.

Here's our swing point. When you look at where this rejected, it was almost 150, was 148. Our other resistance was right around 145.

Whole numbers didn't apply here much, but when you look at the steepness of the angle, you could see here was our initial upward trend in 2017.

If you look at a long-term trend, that's a little more healthy. You're looking at maybe a 30/25 degree angle. That's more logical and realistic.

The more days that you see in one direction, the more likely it'll snap back in the other direction. 

You'll see some of these that are hit the hardest are the ones where they're hitting key resistance levels from the past. Here we are with PayPal about 3% because we're moving here in this sideways action.

Shopify also has a vast stretch that's why in one day you'll get a 3 to 4% pullback because you were already up 20% in about 14 days. So 3/4% is pretty typical and average.

This is what you're watching for as you're looking for when the stocks will stall out

  1. Where are we coming into some past resistance levels?
  2. Are we coming into some whole numbers whether it's 60, 70, 80, 90, 100, 150, 180, 200?
  3. How far stretched are you?

Don't make it too complicated than we'll allow you to find where or when a stock will start probably pulling back or where it should begin to act weak.

You could be an accumulator - regularly collect stocks up until when you retire, and then you slowly sell with time.

As you start seeing these pullbacks, if you're a collector of the square, you buy a little more so you always have cash on reserve and you're just constantly accumulating.

Main concepts to look for in stocks

  1. Previous swing points okay that's number one number
  2. Round numbers
  3. Look how fast a stock accelerates. The faster it goes up, the more likely it's going to come back down. Then, combine that with a decrease in volume
  4. Helps confirm the move - when you have a growing bearish volume or a reduction in bullish volume that also proves that you'll probably get further lower prices.

Author: Sasha Evdakov

Sasha is the creator of the Tradersfly and Rise2Learn. He focuses on high-level education speaking at events, writing books, and publishing video courses on business development, internet marketing, finance, and personal growth.

I'm Sasha, an educational entrepreneur and a stock trader. In addition to running my own online businesses, I also enjoy trading stocks and helping the individual investor understand the stock market. Let me share with you some techniques & concepts that I used over the last 10+ years to give you that edge in the market. Learn More

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