I am getting a large number of emails after President Trump tweeted that he’s imposing new tariffs on $300 billion of Chinese goods. Investors are obviously concerned about the market falling and are requesting information on support levels. Let’s explore with the help of a chart.
Chart
Please click here for an annotated chart of S&P 500 ETF SPY, -0.80%, which represents the S&P 500 Index SPX, -0.81%. An advantage of using the ETF is that you can see the volume. Many retail investors focus on the Dow Jones Industrial Average DJIA, -0.54%, but for support levels it is best to use a chart of the SPY ETF since the big money is tied to the S&P 500. If your portfolio is mostly technology stocks, consider using a chart of Nasdaq 100 ETF QQQ, -1.61%. Please note the following:
• The chart shows four support zones for the stock market.
• Traditional technical analysis uses support and resistance lines.
• For practical purposes, consider eschewing the tradition of using lines; instead, use zones.
• When you use a line, it is implicit that you know the exact level of support or resistance. Isn’t that arrogant? Arrogance will get you in trouble in the stock market. Consider being as humble as you can. Markets are often difficult and it takes a lifetime to master them.
• Those less informed tend to put stops right below the support lines.
• Especially avoid using sharp lines that are visible to anyone based on prior highs and lows. Machines are smarter than you are. Smart people who have programmed these machines know in advance the support and resistance levels that many adherents to the traditional technical analysis use. Smart people take advantage of it. It is common for the price to violate a support line, take out the stops, and then the price bounces. Be aware of such hunt-and-destroy algorithms. Traditional technical analysis is still valuable, but it does not work as well as it used to. To learn the reasons, please click here.
• At The Arora Report we use support zones. Support zones avoid the problems of traditional technical analysis.
• At The Arora Report we use support zones based on money flows that are not readily visible on charts to everyone. Our experience with these zones over decades shows that they consistently give investors an edge.
Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.
What does it all mean?
Consider starting with Arora’s Second Law of Investing and Trading: “Nobody knows with certainty what is going to happen next in the markets.” Often when the market falls, buyers come in at a support zone and then, because of this buying, the market tends to reverse to the upside. When a support zone is broken, it means the sellers overcame the new buyers in the support zone, and then price tends to accelerate down to the next support zone.
Support zones are invaluable tools for investors and traders to make informed decisions.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.
