We can identify the support level in the uptrend in many different ways. This means, for example, by finding places on the daily chart where the market has historically moved sideways and created areas of rotation (consolidation). These places are marked in green in the figure below.

We now have the rotation zones marked. So now let us look at how the market reacted with the return of prices to these rotations. Let us begin with the rotations found in the very left of Chart No. 3. For better clarity, a detail of this is shown in Figure No. 4 below.

Notice how the market reacted (in the yellow circle) with the return of the price to the rotation area. This resulted in the testing of the rotation area and subsequent bounce back of the price to uptrend. The area between the two blue horizontal lines corresponds to the top edge of the rotation area – in such a defined area the market often has the tendency of reacting by a return of the price to this established trend. The ideal place for opening trading is in the circle marked in yellow between the two blue lines. For better clarity, further examples are shown in Chart No. 5, 6 and 7 of model rotations and the reaction of price during its testing.

A very nice rotation area is shown in the figure below (Chart No. 5). We mark its upper edge again with two horizontal lines. We place the upper horizontal line somewhat higher, given that the market occasionally has the tendency to react to a higher level when the price returns to rotation. Now all that remains is to wait for the price to return to this support zone. As can be seen in the chart, the price tested this level at the end of September 2020 (left yellow circle) and bounced back. At the end of October 2020, there was further testing of support and the market reacted again. The first touch of support is usually the best. However, in this case, the second turned out nicely too.

Let us have a look at Chart No. 6. Another nice rotation area has formed here, which the market only got to test 2 years later. The larger and more visible the rotation area, the more likely the market will react to it.

Chart No. 7 below marks a huge movement sideways which arose from May 2015 to December 2016. The market tested this rotation only in March 2020 when the stock markets fell sharply during the Covid pandemic.

We now know how the rotation area looks and how to determine the place where there may be a market reaction. So let us see how we can enter the position. Trading can be opened in many ways, if you believe in the given S/R level and it is at a price level which in itself is already attractive for you then a limit order can be set for the given price. In the event that you still want to see confirmation that the price is reacting to the level, you can wait until a reversal candlestick pattern is formed. Confirmation can also appear on a lower time frame. There are many ways. You can hold the position for a long-term period or a shorter period. However, it is always advisable to have a specific business plan and to approach risk responsibly.

We wish you lots of success, not only in the field of investment. Good luck.

Important notice

This material has been prepared for general information only and does not constitute any investment recommendation of Česká spořitelna, a.s., incentive to buy or sell. The information sources used are generally considered reliable however Česká spořitelna does not guarantee the correctness and completeness of the information provided. Please note that past performance of investment vehicles does not guarantee comparable future performance. The return of the originally invested amount is not guaranteed. Česká spořitelna does not assume responsibility for any losses caused directly or indirectly by the use of the information contained in this information material. This material was compiled by Česká spořitelna, Financial Markets – Retail Investment Unit, and was released for distribution for the first time on 6 March 2017.