If you know anything about me, you know how much I look for support and resistance areas on charts to help give me an edge. Just recently, the S&P 500 ETF (SPY) was challenging a resistance level. The market had rallied at the beginning of November, and around mid-month the SPY was trying to move above the $400 level. Round numbers often act as support and resistance levels on charts. As I often remind traders, ask yourself, “what has a better chance of happening?”
Let’s Take a Closer Look
As you can see from the chart below of the SPY, the $400 level was threatened in three consecutive sessions. If you play the odds, you know the ETF had a better chance of not breaking through that level immediately just like what happened. In group coaching class I reminded everyone to watch and be patient and let the underlying prove it wanted to continue to move higher because the odds were not on the side of a break at that level.
How to Use This Info
As I often say, just because the market is moving higher does not mean the underlying you are watching or trading is necessarily doing the same and vice versa. But generally, stocks rise when the market rises and fall when the market drops. When the SPY was testing resistance at $400, was this the best time to get a bullish market on your side? The answer is no. The ETF and the index had a better chance of stalling out like it did for three sessions than moving higher. Be on the side of the market!
Improving the Odds
When looking at charts and seeing support and resistance levels, just know that the underlying has a better chance of not breaking through that level. In my opinion, it has at least a 70% chance of not doing so. If you are looking at a potential trade, this knowledge can improve the odds considerably.
John Kmiecik
Senior Options Instructor
Market Taker Mentoring
