LESSON - FINDING SUPPORT CONFIRMATION

Understanding Support Levels:

• Definition: Support levels are price levels where buying interest is strong enough to prevent the price from falling further.

• Visual Representation: On a chart, support levels are often represented by horizontal lines that connect the lows of previous price movements, we use a Blue horizontal line to show where potential support and resistance lines are.

• Psychological Significance: Support levels can act as psychological barriers, where investors expect the price to hold, bounce and reverse.

Identifying Support Levels:

• Previous Lows: We look for prior price lows that have acted as support in the past. These lows can be recent or historical, depending on the timeframe we are analysing.

• Round Numbers: Prices often find support at round numbers, such as $10, $50, or $100. These numbers are psychologically significant for investors.

• Moving Averages: Popular moving averages, such as the 50-day or 200-day moving average, can act as dynamic support levels.

• Fib Level Support: We use the Fibonacci Sequence as our main tool to help find support confirmation

  • For Wave 2 pull backs, we look for support between the 0.5 - 0.618 Fib level

  • For Wave 4 pull backs, we typically expect support to be found on the 0.38 Fib

  • Wave C then repeats Wave 2 then, so we look for support between the 0.5 - 0.618 Fib level

• Combining all indications together: The best confirmation of support is when we get a number of these identifiers aligning at the same price level, which we call a Confluence level.....this happens commonly and we discuss this a lot in our chart commentary when it does.

  • The greater the confluence level, the the stronger the support.

• So what is Support Confirmation?

• Bounce or Reversal: The most straightforward indication is a clear bounce or reversal in price direction after reaching the support level. This shows that buyers are stepping in at that level, preventing the price from falling further.  

• Multiple Touches: The support level becomes more reliable if the price has tested it multiple times in the past without breaking through. Each touch reinforces the level's significance as a buying zone.  

• So there are Two types of support confirmation:

  • 1 . V shape bounce: Where a test of support happens once and the price immediately recovers and returns to its original high level

    • This usually happens post earnings when there is an excessive over reaction, a stop loss raid or/and there is large institutions buying.

  • 2. A test of Support happens multiple times, over multiple days/weeks and consolidates by building up strength, we then watch for a gradual move higher, making higher highs and higher lows

    • We wait for the start of an impulse wave to form, movements in 5 waves up, with a 3 wave pull back.

Other forms of Confirmation Signals that can be used in conjunction with the above:

• Volume: Increasing volume on a bounce off the support level is a positive sign, indicating strong buying interest.

• Candlestick Patterns: Bullish candlestick patterns, such as hammer or engulfing patterns, near the support level can also provide confirmation.

• Technical Indicators: Indicators like the Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD) can show bullish divergences near the support level, suggesting a potential reversal.

What we can not plan for:

• A bad earnings:

  • One thing the market hates is when a company does not hit their targets, if they are expected to grow at a particular rate and then guide down, the market punishes this company almost immediately

  • You can not predict if a company is going to lower its guidance or not meet expectations

  • So a Confluence level can be incredibly strong leading up to earnings but if they miss or lower guidance, that confluence level is unlikely to hold

  • Stop Losses can be used in this scenario if you are not sure of a company's future.

• A Black Swan Event:

  • Events like Covid in March 2020 shutting down the entire global system can not be planned for, these events happen and they will happen again in the future, which is why we should always have a portfolio that can withstand an impact like this, by having safe havens and keeping our high risk positions to a smaller amount in our portfolio

  • SEC investigations, DOJ subpoenas, Short Attack reports and hostile takeovers are more common than you think, you can not eliminate this risk and they will bring down a share price....the larger the shock to the market, the greater the people react.

Which is why, when we buy, we always want to buy to hold for Long Term, buying strong companies with a proven track record helps us hold our positions in spite of unplanned shocks impacting our positions.

I will upload a video soon showing what we learnt today in real time on a chart.