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While Technical Analysis is not based purely on Supports & Resistances, media highlighting has made it look as if S&R is the only thing there is to be learnt in Technical Analysis. This is because when a Analyst provides Support & Resistance levels, he can claim to be right no matter how the market has moved.

Unfortunately, trading is never so easy. Unless you understand why X level is support and Y level is Resistance and test it on a Historical basis, one can never be sure as to how feasible it is to trade. Also, a thing to be kept in mind is that what values you use should be determined by your style of Investing / Trading. For example, a Long Term Investor may very well look at longer moving averages ? 100 or 200 for instance whereas for a short term investor those may not be ideally best suited for him.

A short-term trader is more concerned what shall happen in the next few hours / days rather than whether the market will hit a new high or make a new low in the next couple of years. Hence it amazes me that Analysts on TV without caring for what segment of Investors they cater too just jump around giving all sorts of levels.

Many brokerage houses provide Technical Analysis reports where the main focus is on S&R using Pivots ? R1, R2 & S1, S2. Unfortunately these are not only primitive in approach, but also lack any value. Some days, these might prove correct and some days wrong, but since market volatility ensures that one or the other levels are constantly reached / breached, there is no particular advantage in using these sort of levels.

The other point to consider is the probability of a particular level to act as support ? resistance. As we know, reason for some levels acting as good support ? resistance levels is due to the conjunction of forces of demand and supply. At supports, falling prices are halted if strong demand occurs and vice versa. Hence, it is essential that we understand what works in what time frame and then try and devise ways to take advantage of the same.

I hear a lot of persons ridiculing these S&R levels. Unfortunately, most of them aren?t quite aware of the reasoning and logic behind it and are misled by half truths and by the fact that most Analysts on Television give away levels as if markets are bound by them. Support & Resistance levels are just a reference point, nothing more, nothing less. It hence left to us, Traders - Investors to figure out how to use the same.

?Take Care. Happy Trading

Prashanth