Weak vs Strong support/resistance

Raphael wrote:
“how do you determine strong support/resistance vs weak support/resistance?”

Been having a conversation with Raphael in the comments, which any of you can do and I am more than willing to answer any questions. It makes this site more informative if you ask questions.

Well to determine weak support vs strong support/resistance is very ambigous and user dependent. However here is a couple of guidelines that I use for my definition of strong vs weak support/resistance -

Strong Support/Resistance -
A trendline that follows a channel
The 50 dma and especially the 200 dma line.
A horizontal price line that has been touched many many times and bounced off of.

The last one is the ambigous user dependent and very arbitrary line, because there is no set number of times to say that yeah that is a strong line of support/resistance.

Weak Support/Resistance -
A support/resistance zone vs a distinct line
A horizontal price line that has been touched only a couple of times and bounced off
The 30 dma line

These should definitely still be used as support/resistance but it is a “weaker” support/resistance, meaning that it can be broken easier than the three descriptions I have of strong support/resistance. You can trade using these support/resistance lines/zones and be very successful but realize that the trade is a little riskier.

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Credit Spread Calculator - a useful tool

The credit spread calculator confirms the profit, profit percentage and the break even point of a trade.

Income Trader offers a free one.

Here it is - (Click on it to go to the site)

This very useful tool helps the beginner in figuring out if the proposed trade will be profitable and what the break even price is. I highly recommend using this tool until you get a complete handle on trading credit spreads.

Also the markets bounced off support today so we are still in a holding pattern for the near term the trend is neutral or sideways. We will have to wait and see what happens especially to the DOW it is caught between two moving resistance/support lines, the 30dma and the 200dma. This will squeeze the DOW building up pressure so when it breaks either support or resistance it should do so in a big way. The other two major markets I follow (NASDAQ and S&P 500) have soft support lines so there will be no pressure build up but they should follow the DOW if it decides to break.

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Tension mounts!! What will happen next?

With the markets bouncing off resistance again today and making a large drop they are all now sitting at support. The technicals are starting to show some weakness and looking to down turn, in fact stochastics already has.

SO will the support hold with the technicals showing more selling to come? We shall see.

In the meantime, lets review the trading of conservative credit spreads -

Here is our checklist-

Stock/Index Trend - bullish or bearish
Support/Resistance Lines - strong, weak, near, far
Option Chain - profit, expiration date
Credit Spread Calculator - recheck profit, break even point
Stock Quote Detail - News, Earnings, Volatility
Probability Calculator - Likelihood of making a profit

As you can see we are half way through this list.

We have gone over the tools needed, how to set up your charts, did some technical analysis discussion (MACD, Stochastics, Volume, DMA’s) and of course the all imporatnat Support and Resistance, and finally we went over Choosing the Strike Price for the most profit in the 2 to 6 weeks the trade goes for.

So now what is left is the easy part just inputting numbers into specific calculators and checking some news and you are ready to trade. We’ll start tomorrow or the next day. Stay tuned.

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Hitting resistance

Looks like the markets are all at a resistance point. We shall see in the next day or two whether they break this resistance or not.

The DOW is at the 30dma (11,120) as a resistance point, the NASDAQ at 2150, and the S&P 500 is hitting up against the 200 dma (1260). Now there is another resistance point that is more solid and it is the same on all three indices. Take the highs from May and draw a trendline to the highs at the beginning of this month and if you follow that straight line all the way through you will notice that the indices are at that resistance line right now.

Here is the NASDAQ -

Charts as always provided by Big Charts

What I would expect is a bounce off this trendline and a continued downward trend.

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