Lets take a look at some of the basics of technical analysis. Many people want to use fundamentals to try to find good stocks to buy by looking at a companies earnings growth projections, etc. But then they usually have trouble with good entries and exits.
This is where technical analysis comes in. It tries to pinpoint higher probable times to buy and higher probable times to sell. One of the simplest ways to find entries and exits are to locate points of support and resistance. Support is simply a place on the chart where the market feels a stock/index/ETF, etc is at a good bargain in the short term so the buyers start to overtake the sellers and halt the sellers in their tracks.
Support could be viewed as a floor and resistance as a ceiling.
Resistance is where the market feels (at least in the short term) that it has gotten overvalued to the upside and selling overtakes the buyers and halts them in their tracks.
You can see in the Dow Jones Industrial Average chart below that the market felt like the 10,700ish level was a bargain for Dow stocks in the short term and that the 11,250-11,300ish area was a bit overvalued and formed resistance. When buying Dow stocks, this is a good thing to look at because when the DJIA rises overall, it could lift most of the stocks within the Dow and by default increase your position.
Always take a look at simple support and resistance points for the sector or index that involves the group of stocks youre thinking of getting into. Then once the index or sector looks good for a buy, you can drill down into a few stocks within that sector that look good to buy or you can buy an ETF that represents that sector depending on how aggressive or conservative you are.
Someone could buy the DIA (DIAMONDS ETF) for instance that represents the DJIA or they could buy Dow stocks such as GE, MSFT, GM, HD, etc. If you buy the individual stocks, buy only the strongest looking charts. (There are 30 DJIA stocks all together.) Simple areas of support and resistance are one of the most important factors in technical analysis and one of the easiest to learn. One last note on support and resistance: It is most powerful in ranges such as below. These are where the market is in a sideways mode overall.
We will be discussing ranges and trends in upcoming lessons more in depth.
