In this post, we’re going to talk about technical analysis and hitting support and resistance levels.
If you have a question, you can submit one by voice here!
Question about Support Line
Question from Sami: Hi, Sasha. Your videos are great. Just wanted to clarify here though… you draw a support line with just one point touching it? I know this is a rough drawing but wanted to know if you’d actually put value in a support line that’s only been tested by price once?
Here’s the answer: Yeah, I would. The more times that it hits, it is sometimes it plays around.
And, here’s my thought process that I want to share with you.
When you have a support level that it gets hit once then it gets hit twice sometimes if it doesn’t bounce very strongly by the second or third time, it shows that there’s a weakness in the stock.
If it bounces off of just once very quickly, there’s usually strength in the bounce. When you look and evaluate these different companies, having two or three levels of resistance and then a stock breaks it and comes back and touches support multiple times – it’s more confirming. And it feels good on us on a psychological level. But strong stocks can bounce very very quickly off of a single level.
A quick example – Netflix
You can see this stock broke out here because if we back it up, there’s no support and resistance in the past. When you look at this, and we draw and look at this diagram here, really your support here was this gap.
That’s not gapped up, so your support was at that level. Our support was this gap. It hit it one time. That was it – one time. Now, if we continue drawing it, you can see there we’ve hit it a second time.
We got into it, and we bounced. But we bounced in a weak way. And this is what I’m talking about. If it hangs around there, it could be weak, and sometimes you’ll notice that these things will break those supports but for a short period of time. That’s because they’re testing. These money managers, some people are trying to get in it early, and that’s why you’ve got to give stocks a little bit of wiggle room.
If it’s a $100 stock, you might give it $2 or $3 wiggle room. If it’s a $400 stock, you might need to give it $5, $10, or $20 of wiggle room. If it’s a $5 stock, then give it twenty cents of wiggle room or something like that.
In this example, we broke it a little bit here, but it still was the support level.
By the third time, the support held, but you might say it bounced off of that one last point. If you look at the weekly chart, you technically you hit that one support.
You could say it hit it twice, but it’s only two or three times. It’s not a lot. But it still worked, and you had a very strong bounce.
Now could this stock still roll over in the future?
Looking at Square and WYNN
Here we have resistance one time. Well, it broke out eventually. And then here it bounced one time. There’s still value in it because that’s where buyers stepped in. That’s where the direction changed.
Now there are other instances where you might have support where the stock sold off.
Here was our basing area. Here we had support multiple times. And then as we went higher again, we’ve had support multiple times.
Let’s zoom in into that zone so you can see.
We’ve had five weeks where it touched. It could be 10, 12 times that it touches. So you can see this is more of a consolidation pattern. It’s going to have more support and resistance. But stocks that have a very clear and quick direction change may only hit it a couple of times.
As I start looking forward to this support level, you can see it didn’t touch it here.
And it didn’t touch it there. But in theory, it’s very close – that wiggle room that we’ve talked about.
You can see two times right here, and then it changed direction. This, of course, is more confident that there’s a very nice support level there. This stock maybe is not as strong or powerful as Netflix to react and bounce from a reversing trend.
You have to give it some weight depending on the stock, but one or two times is still supported. You have to give it that credit. What if they change direction, it still changes direction. Because that’s where the value buyers stepped in.
- Do I give it weight if the support is there?
The support is there. If it hit it two times, you’re a little more comfortable. Once it starts going like 10, 15 times, and you’re consolidating, you start to get worried about is this thing going to roll over.
In this case, here you wonder: Are we going to roll over? That’s because buyers aren’t stepping up.
You have to always think about rolling over as well. Hanging out at support or a resistance level too long could also be problematic.
I hope this was helpful and insightful and if you have a question submit it by voice here!