How to Use Support and Resistance to Trade Stock Indices

In the above previous lesson trades examples we have looked at support and resistance levels that were not broken. These points held because they were strong enough.

However, sometimes support and resistances levels are not strong enough to stop movement of the stock index price moving in a certain direction. When stock index price moves past these support and resistance points we say that these levels have been broken. That is why we always use a stop loss when trading these levels, just in case they do not hold.

But what happens when these levels are broken, well the levels change one to the other, for example

• When a support is broken it becomes a resistance

• When a resistance is broken it becomes a support

Using trading charts, the examples below show an illustration of what happens when these levels break:

Support is broken it becomes a resistance

In the stock indices example illustrated below, the support that had been tested two times could not hold the third time, the sellers were able to push the stock index price down past this level.

However, the stock index price bounced back up again, but this time the stock index price could not go up beyond this line. The stock index price was there after quickly pushed down by the sellers. This was because the line that was a support had now turned into a resistance.

In stock index trading when a support is taken out, the stop losses placed below that level are also taken out, thus reducing the momentum that the buyers had. This give sellers an opportunity to short sell the stock index and place their stops just above this level which now turns into a resistance level.

Resistance is broken it becomes a support

In the stock indices example illustrated below using the stock index chart, the resistance level that had been tested two times could not hold the third time, the bulls were able to push the stock index price up past this level.

When the stock index price tried to go down again it could not go lower than this level. The stock index price was there after quickly pushed further upwards by the buyers. This was because the line that was a resistance had now turned into a support. This is what happens in stock index trading, when a resistance level is broken it turn into a support level.

Traders who had closed their short sell stock index trades will now open long trades and place their stop losses just below this level.

Major and Minor Resistance Levels

In stock index charts the resistance and support levels formed are either major resistance/support points or minor resistance/support points.

Major Resistance/Support levels

In Major Resistance/Support levels stock index price will stay at this level for some time, either the stock index price will consolidate at this point or form a rectangle stock indices chart pattern when stock index price gets to this point. This level will be tested several times before it is either broken or it holds and stock index price does not get to move past this resistance/support level.

The above examples are good example of major Resistance and Support Levels.

Minor Resistance/Support levels

In minor resistance and support points the stock index price will quickly form these points in the short term and quickly move past these resistance and support points.

Upward Trend: The pattern of this minor resistance and support points will form a series of levels whose general direction is upwards.

Upward Stock Indices Trend Series of Support and Resistance

Downward Trend: The pattern of this minor resistance and support points will form a series of levels whose general direction is downwards.

Downward Stock Indices Trend Series of Support and Resistance