Where to expect Supports & Resistances?

Apurva Sheth
Last time I explained you how psychological factors play a role behind formation of supports & resistances. Charts show a picture of changes in investor sentiment and emotions over a period of time.

Resistance zone are points where trader's greed becomes excessive and turns to fear. Support zone are points where trader's fear becomes excessive and turns to Greed. Breakouts above a resistance or below a support zone shows how and when the investor sentiment has changed. Large Volumes along with breakouts show investor's commitment in the direction of the breakout.

But, where do we expect support & resistance levels to form?

There are a couple of obvious places to look for supports & resistances. I will show one of them to you in this article. And remaining in the following articles. We will see this with a lot of examples.

The simplest and most obvious points that become support or resistances are the previous highs and lows. When some time has passed after a new high or low has occurred the emotional factors starts affecting the market participants and general public at large.

I clearly remember 21st January 2008 when Sensex was already off by 10% from its recent high of 21,206. Market participants were anxious, they were expecting it to be just another normal correction in a bull market. But what followed was awful, 10% lower circuits on the 21st and 22nd January. The index was down by about 25% in a matter of few days. However, many investor's portfolio suffered even bigger drawdowns.

The index eventually managed to recover part of the losses in a few days but the damage was already done. The high of 21,000 was now imprinted in their minds. The high of 21,000 was a hot topic of discussion across social gatherings.

People started comparing their current portfolio value to the value when the index was at 21,000. (which were poles apart) They started hoping, praying even begging for the index to reach to the previous highs so that they can exit. Their portfolios were already battered but nobody knew what was about to come next.

One thing was for sure that people were now deeply anchored to the level of 21,000 on the Sensex (6,300 on the Nifty). These levels were like the peak of Mount Everest which every aspiring mountaineer would look up and wish to conquer. However, these peaks remained as ultimate challenge for the bulls for months and years to come. Mount 21K was eventually conquered after a failed attempt in November 2010 and after lot of efforts in November 2013.

Sensex: Conquering Mount 21K...
Source: Spider Software India

The chart I have illustrated below is much before the 2008 top, it was in April 1992 when the Harshad Mehta's stock scam broke out and Sensex topped out at 4546. This level remained a strong resistance for a long time. This level was challenged twice in September 1994 and in August 1997, but bulls couldn't drive it substantially higher.

Sensex after the 1992 Scam
Source: Spider Software India

There are many more example like this. The best one of them is of Hindustan Unilever Ltd.

HUL wakes up from a decade long slumber
Source: Spider Software India

HUL was a star performer from 1995 to 2000. It was amongst one of the very few stocks to have rallied 6 times during this period when the Sensex was going through a dull phase. HUL topped out at 280 in July 1999. Six months later it hit a high of 323 and closed at 286 in February 2000. It tried again in June 2000 but couldn't close beyond the previous high and settled at 283. The stock had to go through a 4 year long bear market and approximately another 2 years to come closer to the previous highs. It closed at 289 in April 2006. Supply was strong enough to thwart it down. Every other attempt met with selling pressure until June 2011 when the stock finally woke up from a decade long slumber.

IOB: Support down South...
Source: Spider Software India

Indian Overseas Bank Ltd. witnessed tremendous growth from 2001 to 2004. It rallied from 8 Rs. to 75 Rs. during this period. A correction followed soon halving the price to about 37 odd levels. The stock resumed its uptrend and even crossed 200 levels by 2008. The trend reversed and pushed the stock back to 37 levels by March 2009. The previous low acted as support and halted the fall. Later it went on to hit a high of 180 in November 2010. Once again the stock fell to the same level of 37 in August 2013 before bouncing back.

From BSES to Rel Infra: Supports remain the same
Source: Spider Software India

Reliance Infrastructure took over BSES in 2002. It rallied four time from a low of 200 in October 2002 to a high of 800 in March 2004. It traded in a range until June 2006 when it broke below 400 levels. The stock soon boarded a superfast metro train and rallied more than 7 times within the next 18 months. However, this train went out of control by January 2008 and crash landed to 350 levels by October 2008. All the correction that followed afterwards have ended in the range of 300 to 400. I selected this example to show that stocks do not necessarily reverse direction from the exact support (or resistance) levels. Technical Analysis is not a perfect science. You have to allow some flexibility in your analysis. The stocks/index will not reverse from exact levels but somewhere near it. How much margin of safety you want will depend on what kind of a trader/investor you are. It may not be easy for everyone to see the stock dropping from 400 to 300 which is a fall of 25%.

Given these limitations, supports and resistance levels can still give you valuable insights before you decide to trade or invest.

What was your first reaction when the Sensex topped out at 21,000 in January 2008? Did you hope and prayed for it to bounce back to the previous high? Share your views in the Club or share your comments here.

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3 Responses to "Where to expect Supports & Resistances?"
vijay
14 Jun, 2017
i want to become resercher in share marketLike 
jia
10 May, 2015
okLike 
Drjlbansal
11 Jan, 2015
Support and Resistance are used by both daily traders and positional traders.Can we compare support and resistance of a stock with VAL and VAH of Market Profile.Is there any impotance of Pivot Point when you are trading on the basis of support and reistance.Dear Apurva,kindly reply.Like (4)
We request your view! Post a comment on "Where to expect Supports & Resistances?". Click here!