V.17:1 (55-58): Support And Resistance by Stuart Evens

V.17:1 (55-58): Support And Resistance by Stuart Evens
Item# \V17\C01\008SUPP.PDF
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Support And Resistance

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.

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