Technical Analysis Basics: Support and Resistance

Posted on April 2nd, 2009 by MillionDollarMan

Some believe that technical analysis is black magic and has no place in investing. Personally though, I think that technical analysis has some merit as it basically symbolizes market/investor emotion or sentiment. The human nature reaction under particular circumstances tends to repeat itself, which is why technical analysis “can” work.

Learning about all the details of technical analysis is a huge task in itself with a very small percentage of traders that actually beat the market over the long run. This article, however, will go over a very basics principle of technical analysis, support and resistance levels, which may help in your next trading decision.

Support

Support is an approximate stock price where there are buyers. For example, if a stock pulls back in price, then bounces upwards again, it is said to have found support at that price. As stock prices are typically volatile and can bounce around, support is confirmed if the stock price bounces off the same level twice or more times.

support

If there is confirmed support, but closes below that level in the future (with high volume), then support is considered broken and the price will generally go lower until it finds support again. The old support level is now resistance.

Trend lines or moving averages on your stock charts they can also act as support or resistance.

Resistance

Resistance is the opposite of support where it’s a general price area where there are sellers. If a stock is moving up in price and starts to turn around, it is said to have found resistance. Resistance is confirmed when the same range is confirmed twice or more times. Once a resistance level is breached though (with high volume), the stock price will generally go higher. The breached resistance level is now considered support.

resistance

Support and resistance is only a small fraction of what technical analysis is all about and is only meant to peak your curiosity for future research. This article is NOT meant to show you when to buy or sell stocks.

What do you guys think of the topic of technical analysis? I could write more on technical analysis as I’ve been a fairly interested in this topic for a couple years now. However, if you don’t find it interesting, then I’ll stick with the regular programming.

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