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Horizontal Support and Resistance

Updated: Jun 23, 2024

In technical analysis, Horizontal Support and Resistance (S&R) levels are crucial indicators. These levels are identified by two or more lows or highs at approximately the same level in the past, providing support to falling prices and resistance to rising prices. Drawing a horizontal line connecting these points establishes the Horizontal S&R.


When drawing these lines, connect points near the current price action, focusing on the last 1-15 trading days. Keep drawing new lines, while discarding old ones, as the support and resistance levels shift with time as seen visually on the chart. This should be part of your preparation drill.

(Fig 1.1 - Horizontal S&R)


For a comprehensive view:


  • Use a 4-hour (4H) timeframe for commodities.

  • Use a 2-hour (2H) timeframe for Nifty.


This method is straightforward yet highly effective. When price action approaches a horizontal S&R line, there is a high likelihood of a reversal. Strong reversal patterns such as Hammer, Reverse Hammer, Bullish Engulfing, Bearish Engulfing, Double Bottom, or Double Top, forming near these horizontal lines, provide significant confirmation signals.


Understanding and applying Horizontal S&R can greatly enhance your trading strategy by identifying potential reversal points and making more informed decisions.


EXAMPLES


The 4-hour (4H) candlestick chart of copper futures on MCX illustrates the power of Horizontal S&R lines. In this chart, three horizontal lines are drawn to connect key pivot or reversal points, identified visually and marked by oval shapes on the image.


The more points a line connects, the stronger the support or resistance it represents for future price action. Look out for reversal patterns forming at or very near to these lines. In the example below, there are numerous occasions when strong reversal patterns form right at the horizontal.

(Fig 1.2 - Horizontal S&R on Copper Futures)


The 4-hour (4H) chart of Natural Gas showcases the concept of Horizontal S&R through two horizontal lines, forming a horizontal channel. Notice how the price oscillates like a pendulum between the upper and lower lines, often creating reversal patterns at these levels.


Even when the price breaches either line, it frequently returns to test it at least once. Additionally, if the price action penetrates a horizontal zone from above or below, it often tests the opposite boundary. This behaviour highlights the significance of a Horizontal S&R channel in predicting price movements.


(Fig 1.3 - Horizontal S&R on NG Futures)


Below is an example of Horizontal Support and Resistance (S&R) from a 2-hour (2H) Nifty chart over four weeks.

  • Points 1 and 2 occur on Day 1 and Day 3, establishing resistance at the 21,570 level.

  • Points 3 and 4 occur on Day 13 and Day 16, approximately three weeks later, acting as support and causing a gap-up reversal.


The significance of a level is directly proportional to the number of times it serves as support or resistance over 3 to 4 weeks.


In this example, the 21,570 level has reversed the price at least four times, indicating its importance. On the fifth occasion, the price forms a strong Bullish Engulfing reversal pattern after a false sell signal (a brief breach of the horizontal line, inviting sellers, followed by a quick reversal). This sell failure, coupled with a strong reversal at the horizontal level, provides a compelling signal to go long, resulting in a robust rally.


(Fig 1.4 - Horizontal S&R on Nifty Futures)


Please click on "Next Post" to move to Pivot S&R.



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