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Thursday, July 3, 2008

Support and Resistance Levels

Support and resistance levels are the most widely used technical analysis tools by all kinds of traders. Support is a price level at or below the current trading level which act as a barrier for downward price movement of the stock. Resistance is a price level at or above the current trading level which act as barrier for upward price movement of stock.

Support and resistance level can be formed because of a variety of reasons.
  • Support level is created when there are many traders willing to buy stock at a price, and resistance level is created when there are many traders willing to sell stock at a price.
  • At round price levels, like $50 or $60, there can be more number of traders willing to buy or sell, thus making these levels support or resistance for that stock.
  • When market is on a move, stock prices dropping below certain level tempt traders to buy that stock, creating a support level. And similarly stock prices rising above certain level tempt traders to sell off stocks, creating a resistance level.
  • Widespread use of Fibonacci techniques by traders, for predicting support and resistance levels, caused automatic formation of support and resistance levels as traders increasingly buy/sell stocks at these levels.
  • Use of other technical analysis tools like Moving Averages, RSI and Stochastic also can contribute to support and resistance level formation.
The number of times a stock price have touched a support or resistance level can indicate the strength of that level. The strength increases in an order Single (s) – touched ones, Double (D) touched twice, Triple (T) – touched thrice, and more than triple (T+).

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posted by Daniel Pipitone at 3:42 AM

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