Trading With Support And Resistance Lines
The support and resistance level refers to a price at which market forces seem to stop the price from continuing its trend movement.
So support is an imaginary line showing the price at which suddenly buyers (bulls) are more dominant than sellers (bears), a floor on the price action is achieved.
Here demand for the commodity or futures contract or ETF exceeds its supply. Conversely, resistance is like an imaginary ceiling where the price action finds difficulty continuing upward trend movement.
You can now subscribe to the free Commodity Universe Ezine below, and get the latest articles on the commodity sector . Just your first name and email. It's as easy as 1-2-3! Here sellers (bears) are dominating the buyers (bulls), and there is a glut of supply of the commodity or ETF or futures contract which outweighs the demand. Traders and investors in the commodity market will see good buying opportunities when the price of a commodity is at or near its support level.
And let’s say gold pushes through $1,000 and then its all time high, the market would look for the next target where resistance to the upward trend may be encountered.
But if the price touches the resistance and then turns back, that could be a good opportunity to go short on gold.
It is also a signal that if you are long it may be time to exit your trade.
Support and resistance levels are of use in both short and long term trading, and the trader needs to use them in conjunction with other technical tools.
Watch the Trend
Taking a step back from the hour-by-hour and day-to-day price movement, it is possible to see the developing trend.
Most chart software packages draw these trendlines which are based on different criteria. One such method to show the trend is the moving average.
There is the simple daily moving average (arithmetical mean) or the exponential moving average, which gives more weight to more recent days.
So when for example the trend is upwards, resistance is met when sellers outweigh buyers and so the price action turns back towards the trendline.
Time Factor
A resistance or support line is viewed as being a more solid indicator the longer it has shown that the price action has not moved beyond that position.
Whether it is gold or crude oil, you can look at charts for these commodities and pick a support level where that price offers very good value going forward.
So in 2008 if there was a brief economic slowdown and crude oil fell say to $80 briefly, given the dwindling global reserves and tightening demand and supply balance, then over the long term that level could offer excellent value.
Also note that when a support line is broken then that line then becomes a resistance as future moves in price will test it.
Equally, if price breaks through resistance then that line then becomes a future support level.
Focus on Round Numbers
It may not at first seem logical but round numbers often do behave as support and resistance levels.
One explanation is that institutional clients decide to buy when a commodity reaches a low round number such as $100 for crude oil or perhaps to sell gold when it reaches say $1200.
With many commodities they can trade in a very narrow range for some significant time and then they will break out of the range upwards or downwards.
This is when it pays to watch those lines of support and resistance, as they may start a significant bull or bear trend. You want to be ready to ride the trend whether to a new or previous high or down to a new or previous low.
Other systems and techniques used in conjunction with support and resistance are Japanese candlesticks, moving average, Fibonacci levels, and relative strength index.
A very widely used system for gauging levels of support and resistance is Fibonacci retracement and when used in conjunction with simple moving averages, can be very helpful in planning your trading strategy.
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