SPX Plays
Options Trading 101
Apply technical analysis to options trading
Master candlestick charts, support and resistance, trend analysis, Fibonacci levels, and key indicators. Learn to read price action like a professional day trader.
This guide covers the essential technical analysis concepts you need to start reading charts and identifying trade setups.
Technical analysis is the study of price movements using charts, patterns, and indicators to predict future price direction. It's based on the idea that historical price action tends to repeat and that market psychology is reflected in charts.
Price action reflects all available information. By studying how price moves, we can identify patterns and probabilities to make profitable trading decisions.
Studies price charts, patterns, volume, and indicators. Focuses on what price is doing, not why.
Best for: Day trading, scalping, swing trading
Studies company financials, economic data, and news events. Focuses on why price should move.
Best for: Long-term investing, swing trading
For day trading, technical analysis is primary. But don't ignore fundamentals entirely—know when major economic data (CPI, FOMC, jobs) drops, as it can override technicals.
There are fundamentally two macro strategies in trading:
Get into a trend early and ride it in the direction of momentum. "The trend is your friend."
Identify when a trend is exhausted and catch the turn. Higher reward, but harder to time.
The more simple your chart is, the better. New traders add too many indicators which causes confusion. Master price action first, then add 1-2 indicators that complement your strategy.
Charts are visual representations of price data over time. Candlestick charts are the most widely used format because they show the most information per time period.
Each candlestick shows four key prices for a time period: Open, Close, High, and Low.
The thick part showing the range between open and close
The thin lines showing the high and low of the period
Bullish—price closed higher than it opened
Bearish—price closed lower than it opened
Each candle represents a specific time period. The time frame you choose affects your trading style:
Always check higher timeframes first to understand the bigger picture, then zoom in to your trading timeframe for entries. A bullish setup on the 5-minute means nothing if the daily is in a strong downtrend.
Price moves because of imbalances between buyers and sellers:
More demand than supply. Buyers are willing to pay higher prices to acquire positions.
More supply than demand. Sellers are willing to accept lower prices to exit positions.
Supply and demand roughly equal. Price moves sideways until a catalyst creates imbalance.
Supply/demand imbalance suddenly shifts. Price moves quickly in one direction.
A trend is the general direction of price movement. Identifying the trend is the first step in any analysis—you want to trade with the trend, not against it.
Higher highs and higher lows. Demand consistently exceeds supply.
Lower highs and lower lows. Supply consistently exceeds demand.
Price moves sideways. No clear direction—wait for breakout.
New peak exceeds the previous peak—bullish signal
Pullback doesn't go as low as the previous pullback—bullish
Rally fails to reach previous peak—bearish signal
New low breaks below previous low—bearish
Uptrend: At least 2 higher highs + 2 higher lows
Downtrend: At least 2 lower highs + 2 lower lows
A strong move in the direction of the trend. Where the majority of profits are made.
A move against the current trend direction. Where pullback entries occur.
Price breaks a key level in the direction of the trend—continuation signal.
Price breaks structure against the trend—potential reversal signal.
Don't try to predict reversals as a beginner. Trade with the trend until you have clear evidence of a change of character. The trend is your friend until it ends.
Support and resistance are price levels where buying or selling pressure has historically been strong enough to stop price movement. These are the foundation of technical analysis.
Price level where buying pressure prevents further decline
Price bounces up from here
Price level where selling pressure prevents further advance
Price gets rejected here
When support breaks, it often becomes resistance. When resistance breaks, it often becomes support.
If price breaks below support, that level now acts as resistance on retests from below.
If price breaks above resistance, that level now acts as support on retests from above.
After a breakout, wait for price to retest the broken level before entering.
When multiple levels align (support + round number + trendline), the level is stronger.
Trend lines are diagonal support/resistance lines that follow the trend. Always draw lines from higher timeframes first, then work your way down to smaller timeframes. A line from the daily chart carries more weight than one from the 5-minute.
Both have their place. Lines give you precise levels to watch—especially trend lines and key horizontal levels from higher timeframes. Zones acknowledge that price rarely reverses at an exact number. Use lines for precision and zones for flexibility. A line at 6000 might see price react anywhere from 5995-6005.
Indicators are mathematical calculations based on price, volume, or open interest. They help confirm your analysis, but should never be your only reason to enter a trade.
Price action first, indicators second. Use indicators to confirm what you already see in price, not to generate signals from scratch.
Shows market participation. Strong moves should be accompanied by high volume. Low volume moves often fail.
The average price weighted by volume. Institutional benchmark. Price above VWAP = bullish, below = bearish.
Smoothed price averages. Common: 9, 20, 50, 200 EMA. When stacked in order (20 > 50 > 200), trend is strong.
Measures momentum from 0-100. Above 70 = overbought, below 30 = oversold. Look for divergences.
Volume tells you the strength behind a price move:
Strong buying pressure. Trend continuation likely.
Strong selling pressure. Downtrend likely to continue.
Weak rally. May reverse or fail at resistance.
Major interest at this level. Could signal reversal or breakout.
A common mistake: assuming fading volume means reversal. Volume fading in the direction of the trend often leads to continuation, not reversal. You need an influx of opposite-direction volume to change the trend.
When EMAs are "stacked" in order, the trend is confirmed:
Moving averages are lagging indicators—they tell you what happened, not what will happen. Don't use them to time perfect entries; use them to confirm trend direction and find pullback entries.
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Fibonacci levels are based on the mathematical Fibonacci sequence and the golden ratio (1.618). These naturally occurring ratios appear frequently in markets as key support/resistance levels.
Measures how much of a move price has "retraced" (pulled back). Draw from the start of a move to the end of a move.
The 61.8% level (golden ratio) is the most important Fibonacci level. A full retracement to 61.8% before continuation is common in healthy trends. If price breaks below 78.6%, the trend may be over.
Projects where price might go after a retracement. Used to set profit targets.
Price moves the same distance as the initial impulse
Common first target after a pullback entry
Golden extension—strong profit target zone
Extended move target—let winners run here
Fibonacci levels are most powerful when they align with other analysis: support/resistance, trend lines, moving averages, or round numbers. A 61.8% retracement that also hits a support level and the 50 EMA is a high-probability entry.
Chart patterns are recurring formations that often precede specific price movements. Don't trade patterns in isolation—use them with trend analysis and other confluence.
Patterns are recognized by everyone, which means they often fail or get manipulated. Always confirm with volume, trend direction, and key levels before trading a pattern.
These patterns suggest the current trend will continue after a brief pause:
Flat resistance with rising lows. Buyers are getting more aggressive.
Bullish breakout likelyFlat support with lower highs. Sellers are getting more aggressive.
Bearish breakdown likelyStrong up move followed by a tight downward-sloping channel. Continuation signal.
Upside continuationStrong down move followed by a tight upward-sloping channel. Continuation signal.
Downside continuationThese patterns suggest the current trend may be ending:
Price hits resistance twice at similar levels, fails to break. Reversal signal at end of uptrend.
Bearish reversalPrice hits support twice at similar levels, fails to break. Reversal signal at end of downtrend.
Bullish reversalThree peaks with middle peak highest. Break of neckline confirms reversal.
Bearish reversalThree troughs with middle trough lowest. Break of neckline confirms reversal.
Bullish reversalHow price recovers from a pullback tells you about the strength of the move:
Gradual selloff, gradual recovery. Shows buyers maintaining interest. More likely to break out and continue.
Quick drop, immediate recovery. Often short-lived and fails at resistance. Less reliable for continuation.
Having a consistent analysis process removes emotion and creates repeatable results. Here's a framework you can adapt to your style:
Look at daily and 4-hour charts first. What's the overall trend? Where are the major support/resistance levels?
Mark the most important support/resistance levels for the day. Include overnight highs/lows, previous day close, and any visible clusters.
Know what economic data drops today (CPI, FOMC, jobs). These can override technical setups—plan around them.
Based on trend, levels, and overnight action, what's your directional bias? Bullish, bearish, or neutral (no trade)?
Identify 2-3 specific setups you're watching. Know your entry, stop, and target BEFORE the market opens.
Technical analysis is a skill that takes time to develop. Start simple: learn to identify trends and key levels. Add complexity slowly. The best traders have a simple process they execute consistently—that's where the edge comes from.
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Technical analysis is the study of price movements using charts, patterns, and indicators to predict future price direction. It's based on the idea that historical price action tends to repeat and that market psychology is reflected in charts.
Technical analysis focuses on price charts, patterns, and indicators to predict future moves. Fundamental analysis looks at company financials, economic data, and news. Day traders typically rely more on technical analysis, while investors often combine both.
Support is a price level where buying pressure typically prevents further decline. Resistance is where selling pressure prevents further advance. These levels are created by historical price reactions and trader psychology.
Candlestick charts show four key price points per time period: open, close, high, and low. Green/white candles show price closed higher than it opened (bullish), while red/black candles show price closed lower (bearish).
Fibonacci retracements are horizontal lines indicating potential support/resistance levels based on the Fibonacci sequence. Key levels include 23.6%, 38.2%, 50%, 61.8%, and 78.6%. The 61.8% level is called the "golden ratio" and often acts as strong support/resistance.
Start simple: Volume, VWAP (Volume Weighted Average Price), and 20/50/200 period moving averages. More indicators isn't better—focus on understanding price action first, then add indicators that complement your strategy.
A trend is the general direction of price movement. Uptrends have higher highs and higher lows. Downtrends have lower highs and lower lows. Identifying the trend helps you trade with the market's momentum rather than against it.
VWAP (Volume Weighted Average Price) is the average price weighted by volume throughout the day. Institutional traders use VWAP as a benchmark. Price above VWAP is generally bullish, below is bearish. It resets daily.
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