Technicians identify entry and exit signals based off support and resistance bounces or breaks. However, these aren’t always easy to identify.
Charts can help technicians identify potential buying and selling opportunities, including those signaled by support and resistance bounces and breaks. Let’s define both, starting with bounces.
A support bounce occurs in a series of bars at support. TD Ameritrade education coaches refer to this as a CAHOLD, or a Close Above the High Of the Low Day. The pattern first identifies the bar with the lowest price in the series—this is the low day. Then, when a bar has a closing price above the high of the low day, it confirms the pattern, according to many technical traders.
FIGURE 1: A CAHOLD DEFINES A BULLISH BOUNCE. A support bounce is a bullish entry signal, but an exit signal for short-term traders. Chart source: TD Ameritrade. For illustrative purposes only. Not a recommendation.
When technical traders see an upward bounce like this, they expect price to rise. Because of these expectations, this can be considered an entry for bullish traders hoping to profit from a stock’s gains. It can be an exit for bearish investors who’ve profited from the stock’s losses.
A resistance bounce is similar, except it occurs at resistance. TD Ameritrade education coaches refer to this as a CBLOHD, or a Close Below the Low Of the High Day. This pattern identifies the bar with the highest price in the series—this is the high day. Then, when a bar has a closing price below the low of the high day, it confirms the pattern, in the eyes of many technical traders.
FIGURE 2: A CBLOHD DEFINES A BEARISH BOUNCE. A resistance bounce is a bearish entry signal, but also an exit signal for a bullish trade. Chart source: TD Ameritrade. For illustrative purposes only. Not a recommendation.
When traders see a downward bounce like this, the typicality expect price to fall. This makes it a possible exit for bullish traders and a possible entry for bearish traders.
Let’s look at another common entry signal—a break. A break occurs when price penetrates a level of support or resistance.
A resistance break occurs at resistance and is also a bullish signal. According to many technical traders, this means demand has overwhelmed supply and is a bullish sign—technical traders expect the price to keep rising. This break is often accompanied by a surge in volume, which many traders look for as confirmation. However, a surge in volume isn’t always necessary for a breakout to occur.
FIGURE 3: A BREAK OF RESISTANCE IS A BULLISH ENTRY SIGNAL. Breaking resistance suggests that buyers have consumed the supply at this level and must go higher to a new supply of shares. Chart source: TD Ameritrade. For illustrative purposes only. Not a recommendation.
A support break occurs at support. To technicians, this means supply has overwhelmed demand and is a bearish sign—traders expect the price to keep falling. Volume may or may not accompany the breakout. This is because stocks can “fall under their own weight.” In other words, sometimes the stock simply falls because there’s not enough interest to buy.
FIGURE 4: A BREAK OF SUPPORT IS A BEARISH ENTRY SIGNAL. Breaking support suggests that sellers have consumed the supply at this level and must go higher to a new supply of shares. Chart source: TD Ameritrade. For illustrative purposes only. Not a recommendation.
Now, let’s talk about exits. Support and resistance can act as targets, or prices set to exit a trade. A bullish trader could buy using a CAHOLD support bounce and plan to exit at resistance, which is the target.
FIGURE 5: SUPPORT AND RESISTANCE ACT AS PRICE TARGETS. Breaking support suggests that sellers have consumed the demand at this level and must go lower to find enough demand for the supply of shares. Chart source: TD Ameritrade. For illustrative purposes only. Not a recommendation.
Planning entries and exits helps traders manage risk. This is done by stopping an unsuccessful trade to prevent increased losses. It’s also helpful to have some expectations and plans. Remember, stocks can move quickly at times, which can make your entries and exits difficult to choose. This means you may get better or worse order prices than you expected. That’s why it’s important to create a plan and stick to it.
Investools, Inc. and TD Ameritrade, Inc., are separate but affiliated companies that are not responsible for each other’s services or policies. Ryan Campbell is not a representative of TD Ameritrade, Inc.
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