It’s a beautiful morning and you sit down to scour the markets for an exciting new trade. You see a stock fall sharply at the open. Is this a good time to buy, or should you wait for the stock to bounce off support?

Sometimes shares fall due to a panic overreaction. Therefore, they become technically oversold and could bounce as traders reassess the initial impact.

But hoping for a reversal in sentiment, based on a “hunch” that the fall is just a knee-jerk reaction, can be a risky strategy. It can be akin to trying to catch a falling knife. You might enter a trade after a fall and benefit from a rebound. Similarly, the shares might continue falling lower.

So, how do you spot a credible Buy signal after a fall? One common way to trade off stock charts is to spot technical levels: support & resistance. A support level is a trendline that you can draw by connecting several share price lows. If the share price keeps hitting those lows and bouncing off them, that’s a strong indicator that it could do the same again . The more touches you can connect, the stronger the trend.

Here’s a recent example of support: wealth manager St James’s Place has had shallow rising support since late December (the green line on the chart). The shares bounced off this support 4 times, making it a credible trendline. Let’s look at the price action.

On 20 Dec, shares bounce off 2018 lows at 905p and rose +10.8% to 1004p. There is no support trendline yet (only one touch).

On 8 Feb, the shares bounced another 4.8% from 922p to 966p. Now we have our second touch, at which point traders start to get hints of a trendline.

On 28 Feb, St James’s Place shares again rebounded off 930p, rising 10% to 1023p. Finally, you can connect the lows of 905p, 922p and 930p with a continuous support trendline below the three touches.

What’s next for St James’s Places shares? How do you use your knowledge of support trendlines to find the next Buy signal? Looking at the chart, you will notice that St James’s Place shares have pulled back 2.9% from recent highs.

Investors that trade off charts will often look for the shares to fall back to support and bounce again. With St James’s Place having a shallow rising slope, this means the next support level should, theoretically, be slightly higher than the previous one, around 935-940p. No guarantee, but certainly potential for another bounce around those levels.

The opposite trade from support is resistance. Look at this example from JD Wetherspoon. The shares have fallen back from horizontal resistance at 1337p five times since early 2018. The shares this week fell 6.5% from resistance.

Will they re-test 1337p highs, or will they continue falling towards 3-year rising support around 1075p (implied 15.3% downside)? Could this mean that there is now be an opportunity to sell the shares short and benefit from a fall to support?

Support & resistance opportunities such as these appear every day. Accendo Markets highlights such trading opportunities to clients who signed up to our research Gold Pass.

Do you see a potential Buy or Sell trade in St James’s Place, JD Wetherspoon or any other UK Index shares? Will you take advantage next time they bounce?

Sam Springett, Trader, 8 March 2019