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
.jpg)
