Key Takeaways
- A zone of support occurs when a security’s price falls to a predicted low, referred to as the support level.
- This zone acts as a lower boundary that the stock has not previously broken through.
- High probability areas within this zone can result in a trend continuation or reversal.
Understanding a Zone of Support
A zone of support generally highlights an area of price lows beneath which the security has not previously moved. Typically aligned with a support trendline, this area is dynamic due to the continuous trading activities. Professionals mainly utilize technical analysis to identify this zone, which signifies an area where supply exceeds demand and volume tends to be low.
These zones provide enticing opportunities for traders aiming for either reversal or continuation of the trend by using various technical analysis patterns. Channels such as envelope channels facilitated by indicators like Bollinger Bands®, include support and resistance boundaries encompassing standard deviations from a security’s moving average. Other channels, such as Keltner Channels and Donchian Channels, serve a similar purpose.
Additionally, traders use shorter-term trendlines to create tighter channels at a security’s peak and trough, which are known as ascending, descending, or horizontal channels reinforcing support identification.
Support zones, while strategically beneficial, can be subjective and volatile due to market pricing dynamics and common trading methods. Traders often use tools like Fibonacci Retracement, identifying intermediary lines between support and resistance boundaries by percentage to capitalize on favorable trading areas.
Advanced technical analysis charting software further enhances support zones detection by integrating varying color schemes and customizable parameters for support and resistance. Monitoring these zones is crucial as traders can interpret potential reversals or downward continuations for profitable decisions on buying or short-selling.
Zone of Support Example
Consider the Campbell Soup Company (CPB) chart, which shows a well-defined zone of support ranging between $26.50 and $27.50 when represented with two horizontal trendlines. Connecting key peaks and troughs over a twelve-month period clearly discloses this critical zone of support. Traders seek potential price rebounds signaling an upside reversal or detect breakdowns indicating downward trends for strategic trading.
Optimizing your understanding and strategy around the Zone of Support can serve as a game changer in your trading portfolio!
Related Terms: support level, trendline, Fibonacci Retracement, Bollinger Bands, reversal, short-selling.
