Technical Analysis: Support and Resistance

Submitted by Stock Market News on 13 May, 2011 - 17:45

What is support and resistance?

Once you understand what trends are and learn how to interpret them, the next concept will be resistance and support. These levels show the interplay of supply and demand in the stock market, dictated by traders when they are buying or selling.

Resistance

This is the line that connects all the highs in a trend. The market resists going higher because traders are selling the stock. The cumulative weight of selling prevents the price from rising any further. If the resistance level is broken this suggests that the selling has finished on that corresponding price, or sellers have decided to stop selling stocks at the time being. Technical analysts believe that a break in the resistance level serves as a buying signal.

Support

Support levels on the other hand is derived by drawing a line that connects all the lows in a trend. The price is supported because buyers enter the market and prevent it from falling. Continuing low prices suggest that more and more traders are buying in that corresponding price. If the support levels break traders are not buying any more.

Volume

Along with support and resistance levels is volume. Large volumes after a break in resistance or support means that the change is legitimate, and that the price is expected to move in that direction. It serves as a confirmation of the change in a resistance or support.

Chart Patterns

In some instance you can spot a pattern in resistance and support levels. There are various books about chart patterns that a price forms. However they do not work all the time, and are mostly indications of past market movements.

Support and resistance levels is an important part of trend analysis. They can help traders decide when to buy and sell. More importantly, they can help traders spot a trend reversal. If a trader is able to identify a resistance level that is never broken, then he or she can opt to sell because the stock price is likely not to go past this level. They also help test and confirm trends.