Option Trading College

Subject: Basic charting
Instructor: The donFranko
Length: 10 sessions

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Session 2 -- Support and Resistance

There is a saying I like, "The teacher will appear when the student is ready. Are you ready?"

The first thing you will need to do is start to look for patterns in the stocks you choose to play. Each stock has a unique personality and style all it own. The reason for this is people are people and well there is one person who controls each stock traded on the NYSE (specialists) and a few large players who control the NASDAQ (market makers). These people buy the stocks in large quantities and then piece mill them out to you and me. They are investors like us but only with substantially larger money pots to dip into.

Each day when the MM starts up his computers he sees a list of sell orders and buy orders. He takes a look at the stocks closing price and decides where he will open it. Thus the explanation for the Gaps up or down. Once the initial opening has begun the trading public kicks in and drives a stock up and down throughout the day. Now here is the interesting part about this manipulation I was talking about. It happens at the end of the day. If you take a look at the charts below you will see what I mean.

In the first chart we will take a look at an old favorite of mine, Yahoo! Inc. (YHOO). Notice how it stops at certain points along the way? You have to always be in a detective mode to see things. First question would be why did it stop there?

Now take a look at the second chart below.

I have drawn a trend line at the point it stopped at. If you follow the line, you will notice Yahoo has support from a few days back but is this enough to make a buying or selling decision? I think not. Lets dig a little deeper shall we?

It appears to have stopped for no reason right? Well here is where TC 2000 really makes the difference from those freebie charts. I will un-adjust the split back in Feb ‘99 and lets see what we see.

The support line I drew is actually resistance back in Dec of 1998. Yahoo gaped open over that resistance then it became support while it made a new high. Notice how quickly it fell below it and then became resistance again by the time it split? A picture is worth thousands of dollars!!

Now we will go forward to see where it is going to end up? Any guesses?

After making another attempt for the high, Yahoo failed and fell below support. The line is currently becoming resistance again and we have a split coming next week. Did you notice where it stopped falling?

Right where it stopped last time. Are you getting the picture here? Is this stuff amazing or what? Now I will finish drawing the lines at key stopping points and we can predict where this stock will climb or fall to in the future. In my experience I have found this to be accurate better than 70% of the time. Even if it spikes up or down from a key support or resistance it returns to it shortly. Notice the top of the next chart and the bottom.

See where it broke out to a new all time high of $500 but then quickly fell back to old resistance at $450? Now look at the diagonal line, this is where Yahoo is likely to fall after it clears the support from the last dip and notice that the diagonal line intersects the fall before the last split run. Of course it’s not a guarantee but you can sure plan on it being close. Therefore you need to place your orders to buy and or sell accordingly. NEVER try to pick the top or the bottom, just shoot for the fat middle. Also one last note, make sure you buy enough time to ride the dips especially on these Internet stocks.

RETURN TO CHARTING SECTION

 

Profits Up!

The donFranko 

 

 

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