SUPPORT AND RESISTANCE LEVELS

WHAT IS SUPPORT?

•      A support level is the price at which buyers are expected to enter the market in sufficient numbers to take control from sellers.

•      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.

•      Usually support is identified by a previous reaction low or trough on the bar chart.

•      Horizontal lines are drawn on the bar chart to indicate the areas of support and resistance.

•      Support does not always hold and a break below support signals that the bears have won out over the bulls. A decline below support indicates a new willingness to sell and/or a lack of incentive to buy.

•       Once support is broken, another support level will have to be established at a lower level.

CONCEPT OF SUPPORT

•      When price falls to a new Low and then rallies, buyers who missed out on the first trough will be inclined to buy if price returns to that level. Afraid of missing out for a second time, they may enter the market in sufficient numbers to take control from sellers. The result is a rally, reinforcing perceptions that price is unlikely to fall further and creating a support level.

RESISTANCE

 

RESISTANCE

•      A resistance level is the price level at which sellers are expected to enter the market in sufficient numbers to take control from buyers.

•      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.

CONCEPT OF RESISTANCE

•      When price makes a new High and then retreats, sellers who missed the previous peak will be inclined to sell when price returns to that level. Afraid of missing out a second time, they may enter the market in numbers sufficient to overwhelm buyers. The resulting correction will reinforce market perceptions that price is unlikely to move higher and establish a resistance level.

•      A resistance level is identified by a previous price high or peak on the chart.

Types of Support and Resistance

Depending on the duration support and resistance can be categorised into: 

1.Minor Support or Resistance- Support and Resistances that have been formed based on the price movement for ranges measured in terms of weeks.

2. Intermediate Support or Resistance - Support and Resistances that have been formed based on the price movement for ranges measured in terms of months.

3. Major Support or Resistance - Support and Resistances that have been formed based on the price movement for ranges measured in terms of years.

Breakouts and Breakdowns

BREAK DOWN

BREAK OUT

Movement of the stock prices beyond Supports and Resistance led to breakdowns and breakouts. This causes a sudden change in sentiment and led to huge price movement beyond the Supports and Resistance. The support then becomes a resistance in the case of breakdown and the resistance becomes support in case of breakout.

BUY AND SELL SIGNAL

•      Buy Signal

Buy when price touches the support line

•      Sell Signal

Sell when price touches the resistance line.

Breaking Support & Resistance

•      If price breaks below support, then that support level becomes the new resistance level.

•      If price breaks above support, then that resistance level becomes the new support level.

SUPPORT BECOMES RESISTANCE and RESISTANCE BECOME SUPPORT

STRENGTH OF SUPPORT AND RESISTANCE

•      Some support and resistance levels are more important than others. The significance of the support level is identifiable by:

•      the number of times that the level has been respected;

•      the amount of volume that has been traded near the level;

•      whether the level is old or new - recent levels have greater significance;

•      whether the level is a new High or new Low - more extreme levels have greater impact; or

•      a level formed at a round number (e.g. 20.00 or 100.00) leaves a lasting imprint.

TRENDING AND CONSOLIDATING MARKET