Technical Analysis
Support and Resistance
Support and resistance
are price levels at which movement should stop and reverse
direction. Think of Support/Resistance (S/R) as levels that
act as a floor or a ceiling to future price movements.
Support - is a price level below the current market
price, at which buying interest should be able to overcome
selling pressure and thus keep the price from going any lower.
Resistance - is a price level above the current market
price, at which selling pressure should be strong enough to
overcome buying pressure and thus keep the price from going
any higher.
One of two things can happen when a stock price approaches
a support/resistance level. The first is that it can act as a
reversal point, in other words, when a stock price drops to
a support level, it will go back up. The other possibility
is that S/R levels reverse roles once they are broken.
For example, when the market price falls below a support level,
that former support level will then become a resistance level
when the market later trades back up to that level.
 |
| This chart
was supplied by Barchart.com |
The chart above shows an excellent example of support and resistance
levels for General Electric (GE). Notice that once the stock
price penetrated the support level in December, it became
the resistance level.
Another characteristic to be aware of is that S/R levels
vary in strength, leading to certain price levels being designated
as major or minor S/R levels. For example, a 5 year high on
a chart would be a much more significant and useful resistance
level than a 1 month resistance level.
|
Previous
