Support and Resistance
The markets bounce around every day as investors enter and exit, finding the equilibrium price where buyers and sellers are content. When new information becomes available, an exchange will quickly move to a new equilibrium level. When demand is strong and prices cannot move lower, an exchange has found support. When supply is robust, and prices cannot move higher, an exchange has found resistance.
Support and resistance can come in many forms.
Momentum describes the acceleration in prices action. If you think about a train, it slowly picks up speed, and at the point just before it reaches its maximum speed, the acceleration is at its highest. One of the best indicators that can help evaluate momentum is the moving average convergence divergence index known as the MACD. The MACD helps evaluate momentum by evaluating the difference between two exponential moving averages, and determining when the moving average spread is crossing above or below the exponential moving average of that spread.
Sentiment is another indicator that is often used by traders to help that determine if the market is about to change direction. When an exchange is over bought or oversold, sentiment has reached a peak or trough and is likely to change direction. The relative strength index (RSI) can help traders determine if the market is too frothy or too depressed. The RSI is an index that fluctuates between 1 and 100. Levels above 70 are considered overbought while levels below 30 are considered oversold.
By using several technical indicators in conjunction with new information, you can help yourself increase your trading acumen, and become a more successful trader.