Support & Resistance
Support and resistance represent key junctures where
the forces of supply and demand meet. In the financial
markets, prices are driven by excessive supply (down)
and demand (up). Supply is synonymous with bearish,
bears and selling. Demand is synonymous with bullish,
bulls and buying. As demand increases, prices advance
and as supply increases, prices decline. When supply and
demand are equal, prices move sideways as bulls and
bears slug it out for control.
What is Support?
Support is the price level at which demand is thought to
be strong enough to prevent the price from declining
further. The logic dictates that as the price declines
towards support and gets cheaper, buyers become more
inclined to buy and sellers become less inclined to
sell. By the time the price reaches the support level,
it is believed that demand will overcome supply and
prevent the price from falling below support.
After a support level is penetrated, it often becomes a
resistance level; this is because investors want to
limit their losses and will sell later, when prices
approach the former level.
What is Resistance?
Resistance is the price level at which selling is
thought to be strong enough to prevent the price from
rising further. The logic dictates that as the price
advances towards resistance, sellers become more
inclined to sell and buyers become less inclined to buy.
By the time the price reaches the resistance level, it
is believed that supply will overcome demand and prevent
the price from rising above resistance.
After a resistance level is penetrated, it often becomes
a support level; this is because buyers who didn't buy
at that price before it went up are now willing to buy
at that price.
The concept of SUPPORT AND RESISTANCE is essential to
understanding and interpreting the markets. Just as a
ball bounces when it hits the floor or drops after being
thrown to the ceiling, support and resistance define
natural boundaries for rising and falling prices.
Buyers and sellers are constantly in battle mode.
Support defines that level where buyers are strong
enough to keep price from falling further. Resistance
defines that level where sellers are too strong to allow
price to rise further. Support and resistance play
different roles in uptrends and downtrends. In an
uptrend, support is where a pullback from a rally should
end. In a downtrend, resistance is where a pullback from
a decline should end.
Support and resistance are created because price has
memory. Those prices where significant buyers or sellers
entered the market in the past will tend to generate a
similar mix of participants when price again returns to
that level.
When price pushes above resistance, it becomes a new
support level. When price falls below support, that
level becomes resistance. When a level of support or
resistance is penetrated, price tends to thrust forward
sharply as the crowd notices the BREAKOUT and jumps in
to buy or sell. When a level is penetrated but does not
attract a crowd of buyers or sellers, it often falls
back below the old support or resistance. This failure
is known as a FALSE BREAKOUT.
Support and resistance come in all varieties and
strengths. They most often manifest as horizontal price
levels. The length of time that a support or resistance
level exists determines the strength or weakness of that
level. The strength or weakness determines how much
buying or selling interest will be required to break the
level. Also, the greater volume traded at any level, the
stronger that level will be.
Support and resistance exist in all time frames and all
markets. Levels in longer time frames are stronger than
those in shorter time frames. How can Support &
Resistant Levels help you make profitable trading
decisions?
Identification of key support and resistance levels is
an essential ingredient to successful and profitable
trading. Being aware of the support and resistant levels
of stocks and indices can greatly enhance analysis and
forecasting abilities.
If a security is approaching an important support level,
it can serve as an alert to be extra vigilant in looking
for signs of increased buying pressure and a potential
reversal. If a security is approaching a resistance
level, it can act as an alert to look for signs of
increased selling pressure and potential reversal.
If a support or resistance level is broken, it signals
that the relationship between supply and demand has
changed. A resistance breakout signals that demand
(bulls) has gained the upper hand and a support break
signals that supply (bears) has won the battle. |
