Welcome to The Stock Market Millionaire Podcast, episode number 18, Support & Resistance: One of The Best Methods for Finding Tops and Bottoms, or Is It? Ladies and gentlemen today, I want to talk about those that old adage of support and resistance. There are two levels, lines, that are drawn on charts. And it is one of the oldest methods of technical analysis, is to identify support and resistance lines. So when we look at support and resistance lines, I want you to think of – the way that I learned it from my very first training was, think of it as a house. You are standing on a floor, right? If you had a light bulb on the ceiling in the fixture, that was broken, you get a ladder out, you put the light bulb in your hand, you start climbing the ladder, you never look up and you run right into the ceiling.
You hit the ceiling, you fall off of the ladder, and you land on the floor or the support. The ceiling was your resistance. So resistance is what’s up above your head. The floor is what is down below your feet. That had a very good friend of mine, who I learned how to trade the market with. We still to this day are the best of friends. I talked with him not long ago today. His name is Steve Hanks. When Steve got up to teach his very first time in a training environment, what support and resistance is – now, Steve is a very dynamic individual. He climbs up on a desk and he starts pouncing his boot on the desk saying, “this is support!” And, he’s pushing the ceiling tiles, the 2 x 4 drop ceiling tiles in the air, he’s hitting them on the ceiling and saying, “this is resistance!” And, he’s pushing up on those tiles.
Steve’s a great guys, a phenomenal trader. And actually he’s an author. Uh, check it out guys. He’s got a brand new book coming out called “Shitty To Happy in 21 Minutes.” Great book. Not out yet. It’s on the list. It’s coming out very shortly. It’s written, it’s done. I’ve got a copy in the mail coming to me right now. Check it out. It’s a great book. Anyway. The heck with support and resistance. And remember Steve Hanks’ name. He’s a great guy for that stuff.
So one of the oldest methods of technicals is the support and resistance time. The best way for drawing support and resistance lines is this. You want to go back and look historically at the chart and say, “alright, where do I see areas that we have been to multiple times?” You need a minimum of two. In an ideal world, you have three.
And when I say it’s been there, the stock has moved down and come up. That’s one. It’s moved down and then come up. That’s two. It’s moved down. That’s not three. It has to come back up before it’s three. The old adage “don’t catch a falling piano or a falling knife.” And it’s kind of, you’re walking down the Manhattan street and you look up and you realize the piano is falling from the sky and you kind of brace yourself. “Alright, let me catch it now.” Probably not the smartest thing to do. Right? Get out of the way, let it fall. Hit the ground, break all open. I don’t care. The insurance company will take care of it and pick the pieces up later. Right? You want to make sure that it bounces at least two, if not three times off of a line or a level to snap a line in there. So support is the one on the bottom, right?
That would be the same on the top. So if I have three points on the bottom that it hit, I really only need two on the top. Then, I’m fine. If I’m focusing on the top first, I need, for me, I would prefer three on the top and then two on the bottom. As long as one of those two lines has hit at least three times, to me, it’s solid. If it’s two and two, it’s kind of a, “ehh, maybe.” Not saying you can’t use it. It’s a little more aggressive along the way if you do. But again, for validity, you’re going to look for that two to three, two to three times it hits that line. If I can get it more, that’s great. The longer, the better, right? As far as importance or strength is probably the best word for that line. The more it hits it, the stronger that line becomes.
“Now, stocks seem to go back to support and resistance lines over and over again, Rob. How come?” People use the phrase or the words, “it has memory. The line has memory.” It’s not the line is the memory. It’s traders. It’s investors. It’s them that’s driving it back to that same level, but why? Who cares? Pick another line. No, no, no, no. See, traders are looking for an edge, a slight edge to just find something they can give them that advantage over every other trader out there. So, now you see that you have a support line at 20 and we’ve come down 1, 2, 3 times, and we’ve bounced off that 20 line, and you take the entry into the trade, and you’ve got a resistance up at 30. And you’re going, “okay, so 30 is resistance and it’s hit 30 every time….” Again, three times it’s hit… “But I don’t know. You know, if I really let it get all the way to 30, I’m pushing the envelope a little bit. So what if I move it down to 29,” right? The next time it only makes up to 29. The trader’s going to move it down to 28.
They’re going to continue to adjust, to modify that area, to tweak it a little bit, to get that slight advantage over every other trader that’s out there. Do I fault them? Of course not. But when we ask why they’re so important and how come stocks go back there over and over again, it’s because individuals like you and I, traders, investors, floor traders, market makers use those exact same levels. And, we tend to drive the position back to that level just by our natural reactions, even though it’s subconscious and you’re probably not even thinking about it.
Now, support and resistance tradings seems pretty simple. Isn’t it? Well, and this is a question I hear from students all the time. And, the answer is “it can be.” Right? How hard you want to make something. Right? We had one individual that I used to work with that at we used to say, “why take twice as long to do something?… *ringing in the background* (I guess the roof was on fire. Maybe. I don’t know.) Why take twice as long to do something when you can take three times as long, right? He wasn’t doing it the most efficient way that it could have been done. Did it work? At the end of the day, he had an answer. He got to the end goal, to the end game. He got what he wanted out of it. It just took him longer to get there. Was it the right way to do it? Not in my opinion, not in my opinion. Are there traders that do the same thing? Absolutely. There are traders that do exactly the same thing, right? They over-complicate it and make it harder than it is. The phrase, I want you to remember this phrase, write it down, you heard it from me. I’ve used it since 1997. When I first started trading, I think I coined it, but I can’t prove it…
Look left. Look at your chart and gaze to the left and find where that line hits, where it intersects. Don’t force it, don’t make it be the level you want. Let it be the level. It is. Don’t try to go out there and tweak support and resistance to fit your current trade or the train you want to get into or get out of. Make sure that you’re doing this from as emotionless of a state as possible. You want to go ahead and draw those lines in there, which is why it’s always ideal to draw support and resistance lines before you enter a trade, and always draw at least two support levels. So, meaning one line and then a line below it, and draw at least two resistance. One resistance, and then another one above it. You do that before you enter the trade. At least if something happens, you already know in your head, the line is there and you can make a more rational decision then. “Oh, oh, I think the line is supposed to be here, but I think I can get away with putting it here,” right? Instead of trying to rationalize it, you’ve already got an answer before you even start right.
Now, can support and resistance lines be drawn in a trending pattern? Yes they can. Right? And these are all questions that I get from students day in and day out. Can you draw a trend, a diagonal pattern using that same support and resistance? Yes. There’s one key word for support and resistance lines that are trending, and that is “parallel.” Parallel. Make sure your lines are parallel. That is the key to it. When you have a stock that is bouncing off
of a horizontal support, you can take a bullish trade. When it’s bouncing off a horizontal resistance up at the top and coming down, you can take a bearish trade.
Well, it’s a little different with a trending stock. If you have a stock that’s trending up or moving in a bullish fashion, you only take bullish trades on a bullish trend. Well, what would a bullish trade be? The stock bounced off the lower line or the support line. In a bearish trend, the stock is coming down, only take bearish trades when the stock comes to the resistance and rolls over. Never fight the overall trend, because you may think the stock is bouncing and going up higher and you’re trying to take the trade and it actually goes sideways and goes against you in that trend. So ,be very careful to not let that sideways move happen to you. Right? Trending positions are an awesome way to use your lines. Horizontal support and resistances are amazing. Wait until you listen to the podcast that we’re creating, we’ve got coming up shortly on how channeling positions work. Man, that one is going to smoke your away. With that ladies and gentlemen, stay focused on the quest to becoming a great trader, keep crushing it. And remember, you’re just one trade away.