Using Technical Support Levels to Predict Future Price Action

There are two things to watch out for when placing trades at major technical levels like support levels. The chart below is the same TSM chart as above. Notice the false breakout to the upside of the resistance trend line I highlighted in green. These false breakouts or breakdowns happen often near technical support and resistance zones. Notice that when the price broke the support level to the downside it almost appeared to be a false breakdown. This is highlighted in yellow. But the price action only returned to retest support level that has now become resistance and the continuation to the downside developed. Always remember that when a support is broken then it becomes a resistance level. Also remember that you will often see false breaks and retests near technical levels.

A helpful tip in finding a more well defined trend is illustrated below. This chart below is the same as the chart above which already had the dynamic support level mapped out. I duplicated that trend line several times with the same exact slope or angle. Then I placed these parallel trend lines at the extreme peaks and troughs and this price channel has formed. Notice how the price channel gives you strong support and resistance zones to trade off of. There are also several horizontal support and resistance levels all throughout this uptrend in KO but I did not include them for this example. But once you learn to spot the dynamic and the horizontal support and resistance levels at the same time then you will be able to see the more complex candlestick patterns like wedges, bull flags, pennant patterns, double bottoms, cup and handles, fibonacci fans, etc. Essentially all of these candlestick formations are derived from horizontal and dynamic support/resistance levels

Also notice the small rally in the chart below which I have circled in yellow. If we zoom in closer on a smaller time frame then you can see that dynamic or trending support and resistance levels work often on just about any time frame.

The chart below is the area from the yellow circle above on a much shorter time frame, the 4-hour candles. Notice how trading technical levels works on smaller time frames. But one very important fact when trading using technical support and resistance levels is that the smaller the timeframe or candlesticks are then the more false signals you will receive when using them to trade. So it is safer to stick to the candlesticks with the larger time frames to find the more legitimate and valid technical levels.

Another very important aspect of using technical trend lines is the fact that you will often see long candle wicks, gaps up or down in price, or doji stars associated with these technical trend lines. This makes sense when you think about it because a candle wick that dips below support and climbs back up is essentially a false breakdown. A gap up or gap down is a breakout or breakdown. And a doji star shows investor uncertainty of whick way the trend will go. All of this will happen near a support or resistance levels until the breakout or breakdown is obvious and the trend is set in motion.

I tried to touch on the basics. Sometimes it can be overwhelming looking at a chart that has hundreds of trend lines all over it. Just look at how confusing this chart looks down here. Very intimidating. Have you ever heard the term "spaghetti graph?"

So do you trade using technical analysis?