Trading Options: Using Technical Analysis to Design Winning Trades, + Website

CHAPTER 3

Classical Technical Analysis

In this chapter, we explore methods used in classical Western technical analysis, popularized through the texts of Edwards and Magee and others. This includes support and resistance as well as patterns that emerge through the push and pull between supply and demand. By the end of this chapter, you should be able to identify stocks that are potential trading vehicles using these techniques and be ready to explore additional techniques. The closest thing to certainty in the technical analysis world is a horizontal support or resistance line. They do not change, but they are also not made of concrete. Price can just as easily blow right through them or gap over them as it can be halted by these lines. And what has worked in the past may or may not work in the future. With that in mind, let’s start the journey there.

■ Support and Resistance

The simplest technical indicator to look for is horizontal support and resistance, as shown in Figure 3.1. These lines show up in every stock at different points in time. They are called support and resistance because they seem to provide a floor and a ceiling to the price movement in the stock. The chart for DSW Inc. shows both horizontal resistance and horizontal support in the first half of 2013. The upper horizontal line in the chart marks the resistance at 69.50. This can be viewed as buyers and sellers at a crossroads. The buyers were seeing a reason to add to their holdings, but the sellers were taking ...