How to Spot Supports & Resistances

I have been asked how I spot supports & resistances for eg. why did I say in my last post that RHB had support at 1.16 (which is the level it closed at on 14 July despite the broader market falling badly). The attached chart of RHB shows the different S&R levels marked A to D.

A previous top will tend to be a resistance but once that resistance is comfortably breached, it now becomes a support when prices fall. The first support (A) lies at 1.15 to 1.16 and this is shown by A1 & A2, previous highs.

Additionally a previous bottom (i.e. where a fall was stopped) will continue to offer support again. So the second support of 1.05 is given by the 2 previous highs at B1 & B2 and also by one bottom support at B3.

The more highs & low supports there are when taken over a long period, the stronger will be the resistance & support levels. So level D at 0.80 has many bottom supports (i.e. falling prices were supported at this level D1, D2, D3, D4, D5 & D7) and also a resistance (i.e. rising prices were stopped at this level D6). Hence if prices are above 0.80 & falling, they will find support at 0.80. However, if prices were at say 0.70 and rising, the chances are that they will be stopped at 0.80 which will act as a strong resistance.

So RHB has found support at 1.16 (A level) on Friday 14 July, but if market sentiment remains very bad it might fall again but will find stronger support at B 1.05.

So should you sell or hold RHB? If you are comfortable holding the stock & have not bought on margin or contra, then it will be safe to hold as I believe 1.05 will be a strong support. However, if you cannot hold, then if 1.16 is breached, it would be better to sell & buy back if the stock finds support at 1.05.