When analyzing the market, traders usually look for specific signals to determine the best point of entry and exit. Ideally, the more signals appear in a specific price point, the stronger it is. In the context of trading, we call this a Confluence. When a confluence appears in a chart, a trader can use this as an initial basis to build a trade plan on.
In this post, we'll highlight some tips and examples of support and resistance confluences to help you analyze the market better.
What you need to know first
To be able to spot confluences in a price chart, a trader has to first have a good grasp on basic technical analysis concepts. These include support and resistance plotting, trend line plotting, basic technical chart patterns and proper usage of technical indicators. Without these foundational knowledge, a trader cannot pinpoint where the confluence point will appear in a chart. This will lead to faulty analysis and wrongly timed entries and exits.
What are Confluences?
Confluences appear in the chart as a merging of two or more technical indicators in a certain price level. Technical analysts use these as key signals to buy or sell a position in a stock.
Support confluence explained
A support confluence is simply a convergence of two or more technical supports in a specific price level. This means that at this support confluence point, buying volume is likely strong and is a good price level to enter/buy the stock.
A support confluence level will have two or more of the following bullish signals:
- Bullish divergence
- Price bounces at key support level (preferably a multi year support level)
- Price bounces at trend line support
- Price bounces at Fibonacci support level
- RSI within 20 - 30
- MACD bullish crossover
- Golden cross
Resistance confluence explained
A resistance confluence is a convergence of two or more technical resistances in a specific price level. This means that at this resistance confluence point, selling volume is likely strong and is a good price level to exit/sell your stock position.
A resistance confluence level will have two or more of the following bearish signals:
- Bearish divergence
- Price rejection at key resistance level
- Price rejection at trend line resistance
- Price rejection at Fibonacci resistance level
- RSI within 80 - 90
- MACD bearish crossover
- Death cross
Sample Confluence Combinations
Support Confluence
1. Static Support + Trend line Support + RSI oversold
The chart above shows the price action of PSEI from May to September 2020. You can clearly see how the price shifted to a downtrend channel starting June in which the price moved in between the downtrend channel support and resistance levels. However, the downtrend channel ended when the price hit a major support level at 5700. Price proceeded to form a double bottom pattern with 5700 as its key support. At this level, RSI is near 30 which showed that sellers are losing steam and buyers are starting to get aggressive. Looking at this data, we can refer to the 5700 price level as a support confluence point and is a strong level to consider an entry position.
2. Static Support + Trend line Support + Fibonacci Support
The chart above shows the price action of DITO from December 2020 to March 2021. We can see that on January 5, the price formed a new resistance level and began to pullback. Price found a new support at the 10.80 to 11 range. After which, buying spiked and made a strong breakout rally to form a new resistance level at 19. Using the key support at 10.80 and the key resistance at 19, we can use a Fibonacci Retracement grid to plot potential support levels for the pullback. It is then clear that there is a support confluence point at 14.50 - 15 which is where the gap support and the Fibonacci .786 level are. Price proceeds to consolidate above this support confluence level until a spike in buying volume pushes it for a new rally.
Resistance Confluence
1. Static Resistance + Trend line Resistance + Bearish Divergence
The chart above shows the price action of BDO from June 2020 to January 2021. After the 4 month consolidation above the 85 support level, price made a strong breakout rally with high volume. At the 115 price level, it is clearly evident that a Bearish Divergence pattern had formed alongside the price being at both the static resistance and trend line resistance. Selling volume spiked and the price made a steep pullback. Looking at this data, we can refer to the115 price level as a resistance confluence point and is a strong level to consider an exit position.
2. Static Resistance + Trend line Resistance + Fibonacci Resistance
The chart above shows the price action of BSC from January to March 2021. We can see that the price made a parabolic rally on January which peaked at 1.90. A steep sell off followed which bounced at .70. Using the key support at .70 and the key resistance at 1.90, we can use a Fibonacci Retracement grid to check the potential resistance levels. As the price bounced and consolidated, we can see that the 1.30 price level is a static resistance and is also where the Fibonacci 0.5 level is. Price continued to be rejected at this level making it a resistance confluence point.
In a Nutshell
Confluences are strong signal to determine where to buy or sell a stock. The more signals there are, the stronger it is. Traders looking for a buying opportunity will always consider building a trade plan around a support confluence point given that the upside is relatively high. On the other hand, traders looking to sell their positions in strength will keep an eye for resistance confluence points to lock in profits before the sell off kicks in.
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