(By Greg Guenthner) Beginning today, you can start pulling consistent, double-digit gains out of the market.
All you have to do is learn how to spot stocks that are setting up for major moves.
Last week, I told you how technical traders study the supply and demand of a company's stock. These are the two forces responsible for the movement of every single stock that is traded on an open market.
You can study a stock's price action to determine where those supply and demand levels lie. Supply and demand can tell you where buyers will likely step in to pick up shares, and at what price sellers will be more eager to unload the stock.
When supply and demand interact at key levels, intense action can be triggered between buyers and sellers, resulting in a powerful breakout. You can pinpoint these levels by drawing support and resistance lines on a simple stock chart.
Support and resistance levels can be thought of as a kind of price floor or price ceiling for shares. Resistance exists where gluts in supply reside. That may be because it's a price in which there's an abundance of sellers looking to lock in gains. On the other hand, a floor will exist at some lower price, which we call support. Below that price, there's a significant amount of demand for shares just waiting to absorb any selling pressure. That could be because shares suddenly look cheap at that level. Either way, you can see how identifying these levels is crucial when you're looking to trade stocks.
Here's a quick look at support and resistance in action:
The red line represents support. The blue line is resistance. Notice how the stock's price is coiling between these two levels. It is apparent that there is a large supply of shares at $56. This is the level where the stock is encountering selling pressure. At the same time, buyers are showing us they are willing to pay higher and higher prices for this stock. This is evidenced by the higher lows that create the up-sloping support line.
When the supply of shares at $56 is finally absorbed and the stock moves above this key price level, you have the opportunity to bet on a rapid price increase. These are exactly the types of high-probability trades you can make to generate consistent stock market returns.
From here, you can start using support and resistance lines to spot potentially profitable chart patterns. It's the fastest path to short-term trading gains.
Sincerely,
Greg Guenthner