Support and resistance in REIT trading

Support and Resistance in REIT Trading

Introduction

Real Estate Investment Trusts (REITs), like any other traded asset, are subject to the forces of supply and demand. These forces manifest visually on price charts as areas of Technical Analysis where the price tends to find difficulty moving beyond. These key areas are known as *support* and *resistance*. Understanding and identifying support and resistance levels is fundamental to successful Trading Strategies in the REIT market. This article provides a comprehensive overview of support and resistance specifically geared towards beginner REIT traders using MediaWiki syntax. We will cover definitions, identification techniques, how to trade these levels, and potential pitfalls.

What are Support and Resistance?

Support* is a price level where a downtrend is expected to pause due to a concentration of buyers. Essentially, it's a price floor. As the price falls towards support, buying pressure increases, preventing further declines. Imagine a physical floor preventing an object from falling through. In the REIT context, this buying pressure could be from investors seeing a value opportunity, institutional accumulation, or simply bargain hunters.

Resistance* is a price level where an uptrend is expected to pause due to a concentration of sellers. It's a price ceiling. As the price rises towards resistance, selling pressure increases, preventing further advances. Think of it as an invisible barrier halting upward momentum. This selling can be triggered by profit-taking, investors fearing overvaluation, or the release of negative news about the REIT or the real estate sector.

These levels aren't precise price points; they are *zones* where the balance between buyers and sellers shifts. A REIT price might briefly pierce a support or resistance level, but strong buying or selling pressure usually pushes it back within the zone.

Identifying Support and Resistance Levels

Identifying these levels is a crucial skill. Here are several techniques:

1. **Previous Swing Lows and Highs:** The most basic method. Look for significant past lows (swing lows) that acted as a bottom during a previous downtrend. These often become future support levels. Conversely, significant past highs (swing highs) that capped previous uptrends often become future resistance levels. This aligns with the concept of Chart Patterns.

2. **Trendlines:** Draw trendlines connecting a series of higher lows (in an uptrend) or lower highs (in a downtrend). These trendlines themselves act as dynamic support or resistance. A break of a trendline often signals a potential trend reversal. [1]

3. **Moving Averages:** Popular moving averages like the 50-day and 200-day moving averages can act as support or resistance. The 200-day moving average, in particular, is often considered a key indicator of long-term trend direction and can provide strong support in an uptrend or resistance in a downtrend. [2]

4. **Fibonacci Retracement Levels:** Fibonacci retracement levels (23.6%, 38.2%, 50%, 61.8%, and 78.6%) are derived from the Fibonacci sequence and are used to identify potential support and resistance levels based on percentage retracements of a previous price move. [3]

5. **Pivot Points:** Pivot points are calculated based on the previous day's high, low, and close prices. They provide potential support and resistance levels for the current trading day. [4]

6. **Round Numbers:** Psychologically, traders often gravitate towards round numbers (e.g., $100, $50, $25). These levels can act as support or resistance due to the tendency of traders to place buy or sell orders around these numbers.

7. **Volume Profile:** Volume Profile tools display the amount of trading volume that occurred at different price levels over a specific period. Areas with high volume often act as strong support or resistance. [5]

8. **Horizontal Lines:** Simply drawing horizontal lines at noticeable peaks and troughs on a chart. This is a subjective method but can be effective, especially when combined with other techniques.

Trading with Support and Resistance: Strategies

Once you’ve identified potential support and resistance levels, you can use them to formulate trading strategies.

1. **Buying at Support:** This is a common strategy. When the price approaches a support level, you can enter a long (buy) position, anticipating that the price will bounce off the support and move higher. Remember to use a stop-loss order *below* the support level to limit potential losses if the support breaks. [6]

2. **Selling at Resistance:** Conversely, when the price approaches a resistance level, you can enter a short (sell) position, anticipating that the price will be rejected by the resistance and move lower. Use a stop-loss order *above* the resistance level. [7]

3. **Breakout Trading:** A *breakout* occurs when the price decisively moves *through* a support or resistance level. A breakout often signals the start of a new trend.

   *   **Bullish Breakout (Resistance Breakout):** If the price breaks above resistance, it suggests strong buying pressure and a potential continuation of the uptrend.  Enter a long position *after* confirmation of the breakout (e.g., a close above resistance) and place a stop-loss order just below the former resistance level (which now becomes support).
   *   **Bearish Breakout (Support Breakout):** If the price breaks below support, it suggests strong selling pressure and a potential continuation of the downtrend.  Enter a short position *after* confirmation and place a stop-loss order just above the former support level (which now becomes resistance).

4. **Bounce Trading:** This involves buying at support or selling at resistance with the expectation of a short-term move in the opposite direction. It's a higher-risk strategy as the support or resistance may fail.

5. **Trading the Re-test:** After a breakout, the price often *retests* the broken level (e.g., the former resistance now acting as support after a bullish breakout). This retest provides another opportunity to enter a trade in the direction of the breakout.

Important Considerations and Pitfalls

**Support and Resistance are Zones, Not Exact Prices:** Don't expect the price to bounce precisely off a support level or reverse exactly at a resistance level. Allow for some leeway.

**Broken Support Becomes Resistance:** When a support level is broken, it often reverses its role and becomes a resistance level. This is a crucial concept to understand.

**Broken Resistance Becomes Support:** Similarly, broken resistance often becomes support.

**False Breakouts:** Sometimes, the price will briefly break through a support or resistance level, only to reverse direction and move back within the zone. This is a *false breakout*. Confirmation is key (look for increased volume, a strong candle close beyond the level, or other confirming indicators).

**Volume Confirmation:** Breakouts are more reliable when accompanied by increased trading volume. High volume indicates strong conviction behind the move.

**Timeframe Matters:** Support and resistance levels identified on a daily chart are generally more significant than those identified on a 5-minute chart. Use multiple timeframes to confirm levels. Time Frame Analysis

**Dynamic Support and Resistance:** Trendlines and moving averages are *dynamic* support and resistance levels, meaning they change over time.

**News and Events:** Major news events or earnings announcements can significantly impact REIT prices and override technical levels. Always be aware of upcoming events. [8]

**Market Context:** Consider the overall market trend. Trading against the trend is generally riskier. Understand Market Trends.

**Risk Management:** Always use stop-loss orders to limit potential losses. Determine your risk tolerance before entering any trade.

**Combine with Other Indicators:** Don’t rely solely on support and resistance. Use other technical indicators like RSI, MACD, and Stochastic Oscillator to confirm your trading decisions. [9] , [10], [11]

REIT Specific Considerations

REITs are influenced by factors beyond general market dynamics.

**Interest Rate Sensitivity:** REITs are sensitive to interest rate changes. Rising interest rates can negatively impact REIT valuations, potentially leading to breakdowns of support levels.
**Property Type:** Different property types (e.g., retail, office, industrial, residential) have different sensitivities to economic conditions. This can impact the strength of support and resistance levels.
**Dividend Yield:** REIT dividend yields are a key factor for investors. Changes in dividend policy can affect price movements and support/resistance.
**Funds From Operations (FFO):** FFO is a key metric for evaluating REIT performance. Strong FFO growth can bolster support levels. [12]

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