| It's fairly simple when you think about it. The stock market measures greed and fear. If a stock is going up, more people are greedy than fearful. The opposite is true when a stock falls. Charts are a visual representation of those two emotions playing out in the market. What technical analysis is best at is helping traders and investors understand their risk and when they can be confident a stock is going to go up, down, or sideways. One of the easiest concepts to understand is support and resistance. Support is a price level that a stock doesn't drop below. It acts like a floor. For whatever reason, whenever the stock gets to that area, it stops falling as buyers step in. Take a look below at the chart of Enterprise Products Partners (NYSE: EPD). You can see that each time the stock dipped to about $28.60, it rebounded. We don't know (or even care that much) why buyers stepped in at that level, but they did, and the stock eventually moved higher. So, in September or October, if the stock was trading at $29, you could've bought it and felt confident that if it fell meaningfully below $28.60, you would've known it was time to sell and gotten out with a small loss instead of hoping the stock would rebound. Here's an example of broken support - when buyers stopped buying at the support level. This is what I mean when I say to use support to understand your risk. Johnson & Johnson (NYSE: JNJ) had a similar pattern, with support around $159. Each time the stock fell to $159, it rebounded. But then, at the start of November, it broke below $159 and kept going. Once it moved down to $157 or so, traders knew that the stock was unlikely to bounce back up in the near term, so the buying activity at $159 dried up. Resistance is the same as support, but in the opposite direction. It's a ceiling on a stock. For whatever reason, at a certain price level, the sellers overwhelm the buyers and the stock falls. So if you were interested in buying Revvity (NYSE: RVTY) and it was trading at $126, you'd probably want to wait until it broke $128 so you'd know the sellers weren't going to dump shares and push the stock back down like they had before. One last note about support and resistance is that they don't have to be flat lines at one price. Support and resistance can rise or fall in what's known as a trend line. You can see on this chart of the travel company MakeMyTrip (Nasdaq: MMYT) that the stock has been in an uptrend for over eight months, bouncing along a trend line that's just kept moving higher. When a stock comes close to or hits the trend line, the trend line often acts as support and the stock rises. If the stock breaks below the trend line, we know the uptrend is likely over and that we should consider exiting the position. Think of support and resistance as floors and ceilings for stocks. Once they are broken, you know things have changed. And remember, stock charts and other analytical tools are not going to be right 100% of the time, but they shine a light on significant changes in investor psychology. YOUR ACTION PLANIf used properly, the charts will help you minimize your losses and optimize your entry points. And imagine if you could use these chart patterns to make gains as high as... 586%, 434%, and 368% - all in less than 30 days each! It's possible with what I call the "23 Enigma" - a powerful market anomaly I've discovered that occurs on the 23rd of each month. In my new presentation, I break down exactly how it works and how you can start using it to target outsized gains in your own portfolio. The next opportunity is just around the corner. Click here to get all the details before it's too late.
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