by Stuart Evens
Support and resistance are basic tools used by traders to
identify key reversal areas. Here’s a look at the basics of
support and resistance levels and how to determine which
levels might be important in the future.
One premise of technical analysis
is that stock prices are affected
by support and resistance.
As those terms imply,
support acts to keep a stock’s
price above a certain level,
while resistance acts to keep a
stock’s price below a certain
level. In fact, once it has been
determined that a price has acted
as important support or resistance
in the past, it is very likely
that a particular price will do so
again in the future. Drawing support and resistance lines on
stock charts helps determine how significant they were in the
past and how significant they might be again. If we find a
stock trading toward one of these price levels, we can make
some reasonable predictions as to how the stock price might
respond. We can then make trading decisions based on this
anticipated price action.
What are support and resistance, and why do they occur at
definite price levels? What do they look like on price charts?
To help answer these questions, we will take a look at the
charts of stocks with clearly identifiable support and resistance
levels and draw the lines on the charts. Using the
information we glean from doing so, we can estimate the
probability of these levels acting again as support or resistance
when prices approach these levels.
But first, let us define some of these terms and look at what
causes the formation of support and resistance.