We had taken a look at the simpler method of identifying supports and resistances in last week’s column. But these key levels can be found through other methods as well. Few of these are discussed below.
In our previous lessons, we had elaborated on drawing and using up and down trend lines. The long-term trend line support is depicted in Chart 1. Bharti Airtel bounced off this line in June 2006 and is currently hovering above the key support provided by the line.
Moving average lines are other tools that aid in identifying where a down-move can halt or an up-move can find resistance.
The Sensex graph in Chart 2 displays the 200-day moving average line. The index received support from this line in January 22 and again in February 12 before it breached this line in early March.
Another popular method of finding supports is with the aid of Fibonacci ratios (23.6, 38.2, 50, 61.8 and so on). The ratios are calculated for a particular move and are added to the lowest point in the move to derive resistance levels. Conversely, the ratios are deducted from the highest point of the move to derive support levels in a correction.
Chart 3 displays the Fibonacci retracements drawn on the Reliance Natural Resources stock. The correction that began in January in this stock is halting at 61.8 per cent retracement of the up-move recorded since April 2007