Support & 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.
- 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.
- 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.
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.