Identifying Support and Resistance Levels in Technical Analysis

By Stock Research Pro • April 17th, 2009

Support and resistance are concepts employed by technical analysts to identify and exploit stock price trends. The idea is that the price of a stock tends to stop and reverse direction at certain price levels. The support level is where the stock price is likely to break its fall and bounce back up. Resistance, on the other hand, is that price level where the stock price is likely to cease an uptrend and bounce back down. The technical analyst will look to see how often these price levels have been “tested” (that is, how many times the price approached that level and then reversed direction) in order to measure the significance of that price level.

Supply and Demand in Stock Investing

Support and resistance identify the areas on a stock chart of supply and demand for any particular stock. Supply is the area where sellers outnumber suppliers, causing the stock price to fall. Demand is the area where the opposite is true with the number of buyers exceeding the number of sellers, causing the stock price to go up. Understanding this, technical traders seek to identify these levels to they can buy at support levels and sell at resistance levels,

Using a Stock Market Chart to Identify Support and Resistance Levels

You can identify the levels of support and resistance by analyzing a stock market chart. Again, the more times the stock price bounces off support and retreats back from resistance, the stronger these support and resistance levels are.

When reviewing stock market charts, technical investors will often draw horizontal trend lines along relative highs or relative lows to identify and confirm support and resistance levels and identify trading opportunities. To verify a resistance trend line, the investor must observe at least two highs in the same area; at least two lows in the same area to verify support.

Technical investors should bear in mind that defining support and resistance levels is not an exact science and rarely do you see these levels re-tested at the exact prices. More likely, you will identify zones of support and resistance and reference these for your trading decisions.


The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.


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