Introduction Support & Resistance with practical Examples

Stock prices are moving head-to-head battle between a bull (the buyer) and a bear (the seller). The buyer push prices higher and the seller push prices lower. The direction prices actually move reveals who is winning the battle.

According to the illustrator GREG.N000, During the period shown, note how each time prices fell to the 55.10 level, the bulls (i.e., the buyers) took control and prevented prices from falling further. That means that at the price of 55.10, buyers felt that investing in GREG.N0000 was worthwhile (and sellers were not willing to sell for less than 55.10). This type of price action is referred to as support, because buyers are supporting the price of 55.10.

Similar to support, a "resistance" level is the point at which sellers take control of prices and prevent them from rising higher. GREG.N0000. Note how each time prices neared the level of 75/=, sellers outnumbered buyers and prevented the price from rising. illustrator GREG.N000, During the period shown, note how each time prices fell to the 55.10 level, the bulls (i.e., the buyers) took control and prevented prices from falling further. That means that at the price of 55.10, buyers felt that investing in GREG.N0000 was worthwhile (and sellers were not willing to sell for less than 55.10). This type of price action is referred to as support, because buyers are supporting the price of 55.10.

The price at which a trade takes place is the price at which a bull and bear agree to do business. It represents the consensus of their expectations. The bulls think prices will move higher and the bears think prices will move lower.

Support levels indicate the price where the majority of investors believe that prices will move higher, and resistance levels indicate the price at which a majority of investors feel prices will move lower.

But investor expectations change with time! For a few moth since September 2010 investors did not expect the GREG.N to rise above 90/= Yet only a few months later, investors were willing to trade with the GREG.N near 120/=.

When investor expectations change, they often do so abruptly. Note how when prices rose above the resistance level of recent bull stock REG.N, they did so decisively. Note too, that the breakout above the resistance level was accompanied with a significant increase in volume.

Once investors accepted that REG.N could trade above 189/=, more investors were willing to buy it at higher levels (causing both prices and volume to increase). Similarly, sellers who would previously have sold when prices approached 189/= also began to expect prices to move higher and were no longer willing to sell.

The development of support and resistance levels is probably the most noticeable and reoccurring event on price charts. The penetration of support/resistance levels can be triggered by fundamental changes that are above or below investor expectations (e.g., changes in earnings, management, competition, etc) or by self-fulfilling prophecy (investors buy as they see prices rise). The cause is not as significant as the effect--new expectations lead to new price levels.