3 Ways to Identify Support and Resistance - 5 Chart Examples

3 Ways to Identify Support and Resistance - 5 Chart Examples

By Elliott Wave International

Today's lesson considers three ways to identify price support and resistance in the markets you trade.

1. Previous highs and lows
2. Trendline support
3. Fibonacci Ratios

These examples are adapted from Jeffrey Kennedy's Trader's Classroom service.

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1) Uptrends terminate at resistance while downtrends terminate at support. Previous highs and lows often act as resistance and support.

In ALCOA Inc (AA), the September 2012 selloff found support near the previous July 2012 low.

The February 2013 peak occurred following a test of resistance at the January peak at $9.33.

2) Trendlines offer resistance and support for prices.

The 2008 advance in Gold found support numerous times near the trendline that connected the lows of the move, as you can see below:

Conversely, the trendline connecting the highs of Wheat's 2012-2013 decline provided resistance for countertrend price action.

3) Fibonacci ratios also identify resistance and support. As Elliotticians, we often look at retracements, the most common being .382, .500 and .618. In Akamai Tech, Fibonacci support ignited the July and November 2012 rallies:

In the same chart you can also notice how Fibonacci resistance in AKAM halted the July 2012 and February advances.

For more free trading lessons on trendlines, download Jeffrey Kennedy's free 14-page eBook, Trading the Line -- 5 Ways You Can Use Trendlines to Improve Your Trading Decisions. It explains the power of simple trendlines, how to draw them, and how to determine when the trend has actually changed. Download your free eBook.

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GbpAud Short Term View

I would not want to bore you with the long term analysis of this pair. What I know now is that an intraday corrective pattern is forming and I have forecast what price could do to this effect.

In the 4 hour chart below, we could see an emergence of an impulsive wave. Let’s see if we can follow price as it tells us what to do next. The first wave followed by the second corrective zigzag wave with about 50% fibo retracement. 

 

Price broke above the end of wave 1 which is a clear indication that price is searching for where to rest the third wave of the prospective bullish impulsive move.

In the quest to gather momentum to achieve this, price has moved above the first wave and it’s now moving toward the once resistance region that has now turned support. 

The third wave normally is a 161.8% projection of wave 1 taken from the end of wave 2, this will happen at 2.025. For this reason, I see the recent bearish correction as the fourth wave of the impulsve wave 3 of the primary trend.

Zooming down to the 1hour chart to see the emerging corrective pattern more clearly so as to forecast possible region of reversal. In the 1 hour chart below, price has a probability of forming a double zigzag pattern which could end at 1.8800-1.8760 or 1.8600 -1.8650. 

 

 

The former has been tested once and if broken again, we watch for the latter where we will wait for reversal signal to buy and aim profits as price could be on its way to 2.025 in the long run. 

If price doesn’t get to these regions, and rallies up to break the upper channel line, one can also buy and aim high. The former is aggressive with very high reward potentials while the latter is conservative with lower reward potential.

If price conversely breaks below 1.8650 in high momentum with no sign of reversal, the proposed impulsive move is invalidated and the move would be taken as an end of a zigzag ‘ABC’ corrective pattern with ‘C’ 100% extension of ‘A’ from ‘B’. I will update you if the scenario holds.

You can get a regular pdf update of my analysis in your mail box by subscribing to my mailing list. Just send your request to Forexmaster05@yahoo.com.

Usdcad Analysis for 2015

I have the pleasure of going a long way with this currency pair, not just because the last analysis I posted on my blog was on Usdcad, but because I have a view of its past and present movement  ; and the analytical and forecasting tool for the future. From July 2014 when I started the journey, I have made predictions with excellent precision.

Usdcad broke out of a horizontal channel. Few could explain one reason or the other for the recent bullish move, yours sincerely is among the lucky few. The last post on Usdcad on 23^rd December 2014 can attest to that. In the post, I also stated a possible bearish return from 1.1715-1.1800. Presently I am in a bullish position with 100pips profit risking just 40pips.

With my recent analysis which I will soon share with you, I expect a return soon, but at some forecasted Price Reversal Zones

You will need an-above-average knowledge of Elliot wave theory and Fibonacci analysis to absorb all I will state below. If you need an e-book on Elliot wave and fibonacci analysis, you can mail me at forexmaster05@yahoo.com or fix a mentorship program with me and I will use all necessary tools to simplify the studies for you.

OK. Let’s get started.

Going by the long term, weekly chart I can say between January 2002 and November 2007 ( a period of almost 6years), price moved in a way that would have interested many core Elliot wave analysts around the world. Price moved in five non-overlaping waves, what we refer to as an Impulsive move which was bearish. There are a few things that are even more interesting about this move.

·         The fifth wave of the Primary Impulsive move was extended and not surprisingly, the fifth wave of the extended wave 5 was also extended.

·         One would expect a fast move to the region of the wave 4 of the primary impusive wave. Price did just that

After the completion of the Impulsive wave with all the internal wave structures well formed, price rallied to 50% retracement of the 6-years Impulsive move to 1.3050      ( March 2009) in 2 years and 4 months. The completion of an impulsive move must be followed by a corrective pattern which was not known as of the time.

Presently after another 5 years 10 months from March 2009, price has moved up and down in a wavy pattern.

 

 

The bullish correction to 1.3050 in 2009 is labeled as the ‘A’ corrective leg of a projected ‘ABC’ zigzag corrective pattern which was followed by a bearish move , labeled ‘B’ leg of the formative correction ( more that 78.6% correction of A) which ended in July 2011 and followed by an impulsive five wave move which I have been discussing since the second half of last year.

 In the long term, this current impulsive move from 2011 is probably part of the ‘C’ leg of the projected zigzag corrective pattern. The ‘C’ leg should take us to 1.35xx and 1.46xx in the years to come, probably a period of 3-4 years. In the nearer term, what is expected is the completion of the fifth wave of the first 5-wave drive of ‘C’. This completion could take us to 1.06xx before the long term bullish move resumes.

That is where we were coming from and with the eyes of forecasting, we can see where we could be in the coming years. This will help us to prepare further for the task ahead. We will also adjust and re-analyse as price move further. 

It’s a projection, it’s what could happen. While admitting the fact that we should only trade what is happening only but the importance of knowing what could happen can’t be ignored. We can see the present from the the past and use the two to forecast the future while we wait for it.

Zooming down to lower time frame, 4 hour chart, what we could see is a five wave impulsive move beautifully positioned in a channel. With the fifth wave heading to the roof of the channel, we can only wait for a reversal which is imminent.

The fifth wave of the 4 hour Impulsive move can be seen clearly on the 1hour time frame; which is expectedly and clearly an impulsive move also. Bearishness is imminent.

 

What is my target zones of reversal? Fibonacci tools will be of great help. With about 20 Fibonacci projections of price from various important swing points, I have come with two zones.

1.       1.1830- 1.1850 reversal zones are the most probable given the fact that they fall within a strong horizontal ( resistance ) and diagonal ( trendlines )  resistive zones.

·         1.1830 is the 100% Price Projection of wave 1 from wave 4 of the hourly chart

·         1.1850 is the 61.8% Price Projection of waves 1 to 3 from 4 of the hourly chart

·         1.1850 is the 78.6% Price projection of wave 1 to 3 from 4 of the 4 hour chart

2.       1.1890-1.1920 reversal zone is the next if the first reversal zone is penetrated. This is less probable than the first reversal zone considering the fact that it’s above the strong resistive zone. But price can still get there after a brief penetration above the resistive zone followed by an immediate return below it.

A bearish reversal candlestick pattern on the daily or weekly chart, a divergence or any other reversal signal will be enough to start a bearish journey if price gets to any of these zones.

Profit targets could be at 1.15xx, 1.12xx ,1.11xx depending on the entry and risk management.

I see dollar weakening against the Canadian Dollar in the first half of 2015 as I expect a bearish move targeting 1.06xx.

These are probabilities and one is expected to follow price as it unveils more information. How fast things can change by events and economic happenings. Having a knowledge of what price is doing and could do, will serve as a barometer and analytical compass for Us.

I update my blog regularly, you see my old posts and download free e-books on Elliot wave  and Fibonacci analysis .

If you are not in my mailing list, you can forward a request to forexmaster05@yahoo.com and I will send pdf of my Analysis, Elliot wave teachings and recommended trades directly to your mail box.

You can also send a request for an online mentorship course on the following market methodologies.

·         Elliot wave theory and Analysis

·         Fibonacci Analysis

·         Advanced Fibonacci Analysis

·         Momentum Analysis

·         Gann Analysis