Traders profit from price action, with price movements in the direction of the trend being crucial. These movements are driven by the supply and demand for the instrument. Traders typically go long when they anticipate an increase in demand and price for a stock, identifying this price level as a support zone. Conversely, they take short positions when they expect an increase in supply and a decrease in the stock's price, known as a resistance zone.

In today's newsletter, we will explore a method to identify momentum, as well as support and resistance, using a Point and Figure (PnF) chart.

Anchor Column for Support & Resistance.

Anchor column on PnF chart shows momentum. When a column has more than 15 boxes, it is called an Anchor column.

Bullish momentum is represented by an Anchor column of X (Bullish Anchor column) and usually starts when the demand is strong. Bearish momentum is represented by an Anchor column of O (Bearish Anchor column) and usually starts when the supply is strong.

Using these two logics, we can create a method to identify important support and resistance zones. But instead of 15 boxes, an Anchor column is defined as having more than 20 boxes.

The low of a bullish Anchor column can act as an important support zone and can be called Anchor support. The high of a bearish Anchor column can act as an important resistance and can be called Anchor Resistance

Observe the chart below of SUNPHARMA. The red line shows the Anchor resistance. The green line shows the Anchor support. Observe how fast the price moved after the Anchor column formation. Observe the support line near the 300-price level. The price first formed an Anchor support and rose. Subsequently when the price came near the same zone again, the price formed another Anchor support.

Trade setup using Anchor Support & Resistance and Observations

An interesting trade setup can be built using the concept of Anchor Support and Resistance and Principle of polarity.

Principle of polarity states that when a support level is breached, it can act as a resistance level when price revisits subsequently. Also, when a resistance level is breached, it can act as a support level when the price revisits subsequently.

Based on this, two observations can be made:

1. A bullish Anchor column can act as a resistance once it is breached. A bearish Anchor column can act as a support once it is breached. This means that the start of a bullish Anchor column can be the beginning of the next bearish Anchor column subsequently. Similarly, the start of a bearish Anchor column can be the beginning of the next bullish Anchor column subsequently.

2. The probability of bear traps and bull traps forming near these Anchor column levels are usually high. Therefore, when the price is near the previous bearish Anchor column level and it forms a bear trap, it could be used to go long. Also, when the price is near the previous bullish Anchor column level and forms a bull trap, it could be used to go short on the stock.

Observe the chart below of ASHOKLEY. The marked boxes show that the bear traps that formed around the same price level as the previous bearish Anchor column. Also observe how the price moved after the bear trap patterns formed.

Observe the charts below of DIXON. The red boxes show the bear traps that formed near the Anchor resistance levels. Also observe the price levels near 4000 and 800. The price formed Anchor support at the same place where there was previously and Anchor resistance.

Anchor Support and Anchor Resistance is an interesting method to spot support and resistance level. This method uses simple concepts like demand and supply, and Support and resistance. I have explained the concept in further detail with other examples in my YouTube video. Do check it out!!!!