What is Support and Resistance?

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Discover How Support and Resistance Can Help You to Bitcoin Profits

 

In my last few emails to subscribers to this blog, I’ve written that I see Bitcoin investors consistently returning to buy at around the $6,000 level. I also mentioned in my last email that I’ve been slowly buying Bitcoin at just above this level because I felt there is good upside potential versus the downside risk.

 

I might be wrong in my analysis in which case I’ll exit my position at $5,700. I’ll lose money, and I’m comfortable with that. However, I know if I repeat my process of analysis and of weighing up the upside risk versus downside risk enough times, I’ll be profitable over the long term.

 

The process of making buying or selling decisions based on the analysis of charts is called Technical Analysis. Becoming an expert in technical analysis can take many years of study, I first started nearly 20 years ago! If you’re interested in the subject, one of the first books I read and still have is Technical Analysis of the Financial Markets’ by John Murphy. It’s on Amazon for around $35. Many traders I know regard it as the go-to book on technical trading.

 

Anyway, back to the point of this post. How to use price charts to discover the next steps planned by other investors of Bitcoin and how to use it to your advantage. In fact what I’m about to tell you is true for all cryptocurrencies, even stocks, gold, oil, etc. This approach can work for any market where you have a price chart.

 

Support and resistance trading and investing can offer you the keys to profits. So let’s start with support or as it is often referred to it, demand.

 

What is Support?

 

As price gets cheaper and moves down towards an area of support investors wishing to buy will see the lower levels and want to buy. For the investor, this can mean more value. Lower prices allow the investor to buy the same investment with less money.

 

The theory is that once price reaches the support level, the pent-up demand from buyers will overcome the sellers. At the lower, extreme levels only the most desperate sellers want to sell. A seller may be obliged to sell because cash is needed elsewhere. Alternatively, the seller may no longer believe that prices will rise again.

 

Look at the price chart below. The horizontal line shows the area just below the point that investors wanted to buy. The first arrow marks the first point at which buyer demand emerges. That’s in the 60 – 65 area. Then in late September, perhaps a positive piece of news caused the price to pop-up.

 

 

 

At the point, the patient and disciplined investor who hasn’t already bought has missed the pop-up and perhaps will never be able to buy at the 60 – 65 level again.

 

 

 

 

So they may move on to other potential investments or review their buying strategy. Perhaps they might be willing to buy at a higher price subject to certain conditions.

 

Indeed, these patient investors won’t be joining buyers desperate to chase the market higher. Such buyers are the type of buyer who has FOMO (Fear Of Missing Out). It’s a frame of mind that affects many beginner investors and traders which can lead to unsustainable price rises. More on this another time though.

 

Of course, at this stage, disciplined investors don’t know that in only a few weeks time they will have another opportunity to buy at 60 – 65. However, that what happens.

 

Unless this investor has changed his or her criteria for buying this investment, 60 – 65 is the point at which they will want to buy. Price popped-up but buyers were unable to sustain the move so in November the investor got another chance to purchase at 60 – 65.

 

What If Support ‘Fails’?

 

Price is in a continual process to reflect new information. Whether that information is related to cryptocurrencies as a whole or specific to Bitcoin or Ethereum, Ripple, etc. Negative Ethereum news may well impact on Bitcoin. Similarly, positive Bitcoin news might encourage buyers of Ethereum. Price, like new information, is never static.

 

So when new information becomes available, it might be ‘strong’ enough to impact on the investor’s decision to buy. They decide not to buy at 60, but they could be open to buying at a lower price such as 40. In the process, they become one less buyer at the support area, in this case, 60 and one less the sellers have to overcome.

 

When support breaks, it’s a sign that the ‘bears,’ the sellers, have overcome the ‘bulls,’ the buyers. A move below a previous area of support suggests sellers have new incentive to sell at a level that previously didn’t make sense to them.

 

Conversely, faced with the same information, new buyers will become unwilling to commit their money at the current price. A weak market could dissuade potential buyers that price has further to fall. Only if the price drops to even lower levels would these buyers be prepared to accept the risk of investing.

 

Remember, the price of Bitcoin is in a perpetual state of change. New information can have a positive, negative or neutral effect on investors’ decisions. Therefore, any movement in the price might be temporary, or it can have a more latest impact. The impact this new information will have on investors will change according to the significance of the data itself.

 

The chart below is the long-term price chart of Crude Oil.

 

 

The financial crises impacted heavily on the price of oil. Less economic activity means less demand for oil. Although price did recover during the following months and years, it never developed a sustainable advance like that before the financial crisis. During this time buyers supported price at higher and higher levels. However, also during this time, the news that the world had too much oil was causing a major structural shift away from oil drilling.

 

The blue line I’ve marked on the chart is where there was a small but steady increase in support. Once price hit support, with one or two exceptions, price didn’t show much desire to continue up. This state of indecision in the market continued for months. The market spent much of this time digesting the fact there was too much oil in the world.

 

Then, in the second half of 2014, support gave way. Sellers swamped the little demand there was. Whatever the catalyst was, investors whom previously bought at the support disappeared. Sellers took control, encouraged by the surplus oil and with oil investors fearful of the future.

 

Resistance is An Invisible Ceiling

 

While support can be considered as a proven, price level for an investor to buy at, we could regard resistance as a price level sellers might want to sell their investment.

 

Resistance has a different psychological point of view. Unlike buyers, sellers already own the investment. They now wish to pass their investment on to someone else. They have reached their profit objectives from the investment, and now they want to sell. The exception to this would be panic sellers whom I referred to above. These sellers want to sell at the first available price to either lock in whatever profit they have or to stop them losing any more money.

 

The sellers who sold at the first point marked on the chart set a precedent. They were perhaps investors who bought at much lower prices. They made their profits and were happy to sell their investments.

 

This point created an invisible ceiling for future sellers (owners of the investment). When price returned to the 37 area, investors skeptical that the price would continue sold their stakes. Thus, for a second time, resistance was confirmed at 37. I’m not saying that all investors in this market sold, only enough to overcome the buyers.

 

Then, on the 3rd time price rose to 37, something changed. We can’t be sure what caused it but let’s assume we’re looking at the price chart a pharmaceutical stock. On the morning that the price popped, the pharmaceutical company released positive news about a significant drug breakthrough.

 

A positive news release is only a hypothesis. We can’t be sure. However, the why is irrelevant, and furthermore, the market is irrelevant. We could be looking a looking at the price for oil, Bitcoin or Apple stock. As an investor, the point you should understand is that the market is irrelevant. Instead, you should focus on what the price chart is telling you about the psychology of other investors. 

 

 

The price chart above is for Bitcoin going back a few months. I’ve included two red lines to mark where the resistance was. In my first example resistance was a neat horizontal line. However, that’s not always the case as this second price chart shows.

 

The first red line is steep. If you take out the peaks, there’s evident resistance from sellers on the way down. We can assume these sellers were desperate to sell (and we know that’s true from the headlines at the start of the year). These investors lowered and lowered the price they were willing to sell their holdings. They were fearful, most investors of cryptos were afraid at the time.

 

Over the following months, the selling abated. The price decline became more gradual. On the opposite side, supporting price can be seen at that $6,000 level I keep talking about and on the upside, resistance is at a progressively lower price.

 

Price is becoming trapped. A break above what I think is around the $7,500 area will see renewed interest from investors and this is when you need to be paying attention.

 

Using price charts can reveal a great deal about the activities and potential shifts in the mood of other investors. Identifying critical areas on the chart where buyers have previously returned can help determine a point to buy your Bitcoin investment.

 

If there’s one thing I want you to take away from what I write, that to develop patience and your own investing style. It doesn’t matter what style it is, as long as you can repeat the process over and over you’ll be profitable. In my next post you’ll discover the 3 most important chart types you should be using in your Bitcoin analysis.

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