StockMarketTechnicalAnalysis: Support&Resistance

Support and resistance are two foundational concepts in stock market technical analysis. Traders should know the key support and resistance as it helps to understand market sentiment and optimise entry and exit. So, let’s take a look at what exactly is support and resistance and how we can use it to improve our profitability:

Resistance

When demand for a stock is greater than supply of that stock i.e. there are more buyers than sellers, price of that stock starts to rise. Prices rise until a point where the price becomes so expensive, that it far exceeds the underlying valuation of the stock. At this price, demand for that stock starts declining as buyers become reluctant to purchase the stock at an expensive price. Buyers who bought at lower prices may also start booking profits. This starts driving the price of the stock down. The price at which the uptrend stops, is called the resistance price. A resistance acts like a “ceiling” to an uptrend.

Support

When demand for a stock is less than supply of that stock i.e., there are more sellers than buyers, the price of that stocks starts to fall. Prices fall until a point where the price becomes so cheap, that the stock becomes very attracting given the underlying valuation of the stock. At this price, demand for that stock starts rising as buyers look to buy cheap. Due to this, price starts rising slowly. The price at which the downtrend stops is called the support. A support is considered a “floor” in the downtrend.

USING SUPPORT & RESISTANCE TO TRADE

Support or Resistance can be a specific price level. If prices close to each other have frequently acted as support or resistance in the past, they can be combined to form a support or resistance zone. There are many ways in which we can use support and resistance levels to optimise our trades. For example: we can execute fresh buys when a resistance is broken or use resistance as profit booking target. When support or resistance levels are broken, it is assumed that the supply and demand forces have changed and therefore, new levels of support and resistance need be established.

Change In Polarity

A level which once acted as resistance, once broken will act as support in the new trend. Similarly, a level which once acted as support, once broken will act as resistance in the new trend. This is called change in polarity of support and resistance.

ESTABLISHING SUPPORT & RESISTANCE

Support and resistance can be found in all charting time periods; daily, weekly, monthly. These levels can be established visually looking at historical price movement or using tools like moving averages, trendlines and Fibonacci levels. We will look at each of these methods in future posts.

So there you have it - support and resistance - which are a crucial concept in stock market technical analysis.

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