Support and Resistance
Support is a price level where a stock will stop moving downward depending on demand. As the price of assets or securities drops, demand for the shares increases and forms the support line. Meanwhile, resistance zones arise due to a sell-off when prices increase.
Think of it as a floor of support or a ceiling of resistance.
A stock might pull back and you’d want to see if it finds support at key areas, such as in a moving average line, the average price of a security during a specific time period.
For example, a 200-day moving average looks back in time and averages the price over the last 200 trading days. A 50-day moving average does the same over 50 days. These indicators are often used to find buying or selling signals. As the price drops and approaches support, buyers (demand) become more inclined to buy and sellers (supply) become less willing to sell.
A stock finds support when large investors buy up a particular stock. You might want to hold or add shares to your position when you see evidence of many investors buying a particular stock because it shows that fund managers are buying shares.
On the other hand, a stock might not find that support and could burst through a moving average. That’s an excellent “sell” signal because it shows that fund managers have gotten rid of shares.
Support and resistance levels are important points in time where the forces of supply and demand meet. These support and resistance levels are seen by technical analysts as crucial when determining market psychology and supply and demand. When these support or resistance levels are broken, the supply and demand forces that created these levels are assumed to have moved, in which case new levels of support and resistance will likely be established.
Support Support is the level at which demand is strong enough to stop the stock from falling any further. In the image above you can see that each time the price reaches the support level, it has difficulty penetrating that level. The rationale is that as the price drops and approaches support, buyers (demand) become more inclined to buy and sellers (supply) become less willing to sell.
Resistance Resistance is the level at which supply is strong enough to stop the stock from moving higher. In the image above you can see that each time the price reaches the resistance level, it has a hard time moving higher. The rationale is that as the price rises and approaches resistance, sellers (supply) become more inclined to sell and buyers (demand) become less willing to buy.