Support and Resistance

Support and Resistance are the two common terms which are related to each and every stock chart. Support is the price level at which demand is thought to be strong enough to prevent the price from declining further. And the opposite is true for the Resistance. It is the price level at which selling is thought to be strong enough to prevent the price from rising further. 

Below example shows how to create a support line on the chart.

Resistance Line can also form in the same manner with the straight line indicating the resistance for the stock price at certain level. Support Line and Resistance Line is not always straight as shown above, Support Line and Resistance Line can also form in incline and decline order. Below example shows how to create support Line if the stock is very bullish or bearish. 

Another final way in which Support or Resistance Line can be created is by using the 50 or 20 MA(Moving Average) line. Below example shows how Moving Average worked as a support and resistance for this stock. 

Many times Support Line starts acting as the Resistance Line and Resistance Line as Support Line. Once the stock price breaks and goes above the Resistance Line then that Resistance will start acting as a Support Line for the stock price and vice-verse as well.

Support and Resistance Lines are very common in understanding the charts and the price trend of the stock. It helps understand when is the right price to buy a stock is and when to sell.

Charting SideKick - RSI

One of the important asset in reading the stock chart is RSI. RSI stands for Relative Strength Index, it is used as a technical momentum indicator in an attempt to determine overbought and oversold condition of a stock. More detailed info on how RSI and how it’s calculated can be found here: Detailed RSI
 

Following is an example of how RSI looks like:-

 

RSI goes from 0 – 100 as seen above in the graph. Most of the graphs calculate RSI in 14 average period. It can the decreased or increased depending on how you are trying to invest. If you are trying to invest for short term you can change the 14 avg period to 7 and vice versa for long term.

If you see the RSI graph there is a line at 70 and a line at 30. Here if RSI goes above 70 it’s considered as overbought condition and if goes below 30 it represents oversold condition.

RSI can be very helpful in order to decide when the time to get in the stock is or when to get out. Below chart shows how RSI is helpful in making such decisions.

NUGT:-



When it goes above 70 doesn’t always mean that you should make the buy call. If the stock is very bullish it can stay there for long period of time. As shown in the below example. RSI stayed above 70 for long period of time. Since it was a very bullish time period for that stock you can consider the 70 line to 80 line in that case. During this time period, keep an eye for any bullish reversal candlestick pattern.


DWTI:-



The opposite of above applies to a very bearish stock as well. And can be seen in the below example.


UWTI:-




RSI is also helpful in deciding when the reversal patter is coming. It can indicate that bullish or bearish reversal is near time and depending on that we can make our decision of buying or selling the stock.


USO:-

 

As we learned from the above RSI holds very important data in the chart and can be very helpful in deciding the upcoming trend of the stock price. RSI alone is not completely reliable in predicting the stock price, but with the other assets like candlesticks and MACD it is definitely a great tool that can be very helpful at times.