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Friday September 03, 2010 |
Support
and Resistance
Support and resistance
are one of the cornerstones of technical analysis. Support and resistance are
simply the areas where buyers and
sellers have shown a willingness to either buy (in the case of support) or sell
(in the case of resistance).
That may seem a bit simplistic but very often
price is ultimately governed by basic human emotions. We have all been in the
position where we buy a stock and immediately it begins to decline. Our
basic instinct is to not sell this stock until we can do so without suffering a
loss. If enough investors buy at the same price point and immediately suffer
"buyers' remorse" the result is a resistance point. Resistance
points often occur after a stock has had a lengthy advance into a key news
event. As investors "sell on the news" some unlucky investors
are trapped the absence of new buyers leads to weakness, the stock begins to
fall. Every time
the stock rallies to this level those that bought poorly will sell.
Support is a more difficult concept.
Support is usually the result of buyers being rewarded for purchasing a stock at a
specific price. If you buy a stock at a certain price level and it immediately
rallies the odds are you'll feel very good about yourself and your purchase
price. After selling that stock for a profit, you are likely to consider
buying the stock on any retreat to this level (if it worked once it is could
work again). If enough investors are willing to buy at a certain level it
becomes support.
Understanding
the nuances of support and resistance is the most important part
of technical analysis. Now let's look at support and
resistance in some common technical patterns, the flat base, the
downtrend and the always popular uptrend.
price
and time are linear
support and resistance in a
flat base
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Basics > Support & Resistance 
