TECHNICAL ANALYSIS TECHNICAL ANALYSIS BASIC EDUCATION

Support and Resistance Basics

By CASEY MURPHY Updated September 28, 2023

Reviewed by CHARLES POTTERS

Fact checked by KIRSTEN ROHRS SCHMITT

Part of the Series

Guide to Technical Analysis

Support and resistance are two foundational concepts in technical analysis.

Understanding what these terms mean and their practical application is
essential to correctly reading price charts.

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 Prices move because of supply and demand. When demand is greater than
supply, prices rise. When supply is greater than demand, prices fall. Sometimes,
prices will move sideways as both supply and demand are in equilibrium.

Like many concepts in technical analysis, the explanation and rationale behind
technical concepts are relatively easy, but mastery in their application often
takes years of practice.

KEY TAKEAWAYS
Technical analysts use support and resistance levels to identify price
points on a chart where the probabilities favor a pause or reversal of a
prevailing trend.
Support occurs where a downtrend is expected to pause due to a
concentration of demand.
Resistance occurs where an uptrend is expected to pause temporarily,
due to a concentration of supply.
Market psychology plays a major role as traders and investors
remember the past and react to changing conditions to anticipate
future market movement.
Support and resistance areas can be identified on charts using
trendlines and moving averages.
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 What Is Support?
In a downtrend, prices fall because there is an excess of supply over demand.
The lower prices go, the more attractive prices become to those waiting on the
sidelines to buy the shares. At some level, demand that would have been slowly
increasing will rise to the level where it matches supply. At this point, prices will
stop falling. This is support.

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 Support can be a price level on the chart or a price zone. In any event, support
is an area on a price chart that shows buyers’ willingness to buy. It is at this
level that demand will usually overwhelm supply, causing the price decline to
halt and reverse.

What Is Resistance?
Resistance is the opposite of support. Prices move up because there is more
demand than supply. As the prices move higher, there will come a point when
selling will overwhelm the desire to buy. This happens for a variety of reasons. It
could be that traders have determined that prices are too high or have met their
target. It could be the reluctance of buyers to initiate new positions at such rich
valuations. It could be for any other number of reasons. But a technician will
clearly see on a price chart a level at which supply begins to overwhelm
demand. This is resistance. Like support, it can be a level or a zone.

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Once an area or “zone” of support or resistance has been identified, those price
levels can serve as potential entry or exit points because, as the price reaches a
point of previous support or resistance, it will do one of two things: bounce
back away from the support or resistance level, or violate the price level and
continue in its prior direction—until it hits the next support or resistance level.

The timing of some trades is based on the belief that support and resistance
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 zones will not be broken. Whether the price is halted by or breaks through the
support or resistance level, traders can “bet” on the direction of price and can
quickly determine if they are correct. If the price moves in the wrong direction
(breaks through prior support or resistance levels), the position can be closed at
a small loss. If the price moves in the right direction (respects prior support or
resistance levels), however, the move may be substantial.

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The Basics
Support and resistance can be found in all charting time periods; daily, weekly,
and monthly. Traders also find support and resistance in smaller time frames
like one-minute and five-minute charts. But the longer the time period, the
more significant the support or resistance. To identify support or resistance,
you have to look back at the chart to find a significant pause in a price decline
or rise. Then look forward to see whether a price halts and/or reverses as it
approaches that level. As has been noted above, many experienced traders will
pay attention to past support or resistance levels and place traders in
anticipation of a future similar reaction at these levels.

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 Technical analysis is not an exact science, and sometimes the price will dip
below support levels or reverse before it gets to the prior support level. The
same is true for resistance: Price may reverse before it gets to the prior
resistance level or break above it. In each case, flexibility is required in
interpreting these chart patterns. This is why support and resistance levels are
sometimes referred to as zones.

There is nothing magical about these price levels. It is simply that many market
participants are acting off the same information and placing trades at similar
levels.

Most experienced traders can share stories about how the price of an asset
tends to halt when it gets to a certain level. For example, assume that Jim was
holding a position in stock from March to November and that he was expecting
the value of the shares to increase.

Let’s imagine that Jim notices that the price fails to get above $39 several times
over several months, even though it has gotten very close to moving above that
level. In this case, traders would call the price level near $39 a level of
resistance. As you can see from the chart below, resistance levels are also
regarded as a ceiling because these price levels represent areas where a rally
runs out of gas.
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Support levels are on the flip side of the coin. Support refers to the price level
on a chart where equilibrium is reached. This means that demand has
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 increased to match supply. This causes the decline in the price of the asset to
halt; therefore, the price has reached a floor. As you can see from the chart
below, the horizontal line below the price represents the price floor. You can see
by the blue arrows underneath the vertical line that the price has touched this
level four times in the past. This is the level where demand comes in,
preventing further declines. This is support.

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Trendlines
The examples above show that a constant level prevents an asset’s price from
moving higher or lower. This static barrier is one of the most popular forms of
support/resistance, but the price of financial assets generally trends upward or
downward, so it is not uncommon to see these price barriers change over time.
This is why the concepts of trending and trendlines are important when
learning about support and resistance.

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 When the market is trending to the upside, resistance levels are formed as the
price action slows and starts to move back toward the trendline. When the is
moving against the prevailing trend, it is called a reaction. Reactions can occur
for a large variety of reasons, including profit taking or near-term uncertainty
for a particular issue or sector. The resulting price action undergoes a “plateau”
effect, or a slight drop-off in stock price, creating a short-term top.

Many traders will pay close attention to the price of a security as it falls toward
the broader support of the trendline because, historically, this has been an area
that has prevented the price of the asset from moving substantially lower. For
example, as you can see from the Newmont Corp. (NEM) chart below, a
trendline can provide support for an asset for several years. In this case, notice
how the trendline propped up the price of Newmont’s shares for an extended
period of time.
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 Image

Image by Sabrina Jiang © Investopedia 2020

On the other hand, when the market is trending to the downside, traders will
watch for a series of declining peaks and will attempt to connect these peaks
together with a trendline. When the price approaches the trendline, most
traders will watch for the asset to encounter selling pressure and may consider
entering a short position because this is an area that has pushed the price
downward in the past. To be a valid trendline, the price needs to touch the
trendlines at least three times. Sometimes with stronger trendlines, the price
will touch the trendline several times over longer time periods. Also, in an
uptrend, the trendline is drawn below the price, while in a downtrend, the
trendline is drawn above price.
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 The support/resistance of an identified level, whether discovered with a
trendline or through any other method, is deemed to be stronger the more
times that the price has historically been unable to move beyond it. Many
technical traders will use their identified support and resistance levels to
choose strategic entry/exit points because these areas often represent the
prices that are the most influential to an asset’s direction. Most traders are
confident at these levels in the underlying value of the asset, so the volume
generally increases more than usual, making it much more difficult for traders
to continue driving the price higher or lower.

Important: Unlike the rational economic actors portrayed by

financial models, real human traders and investors are emotional,
make cognitive errors, and fall back on heuristics or shortcuts. If
people were rational, then support and resistance levels wouldn’t
work in practice!

Round Numbers
Another common characteristic of support/resistance is that an asset’s price
may have a difficult time moving beyond a round number, such as $50 or $100
per share. Many people think in terms of a round number, and this carries over
into the stock market. Because people have easier time visualizing in round
numbers, many inexperienced traders tend to buy or sell assets when the price
is at a round number.
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 Also, many target prices or stop orders set by either retail investors or large
investment banks are placed at round price levels rather than at prices such as
$50.06. Because so many orders are placed at the same level, these round
numbers tend to act as strong price barriers. For example, if all the clients of an
investment bank put in sell orders at a suggested target of $55, it would take an
extreme number of purchases to absorb these sales and, therefore, a level of
resistance would have been created.

Moving Averages
Most technical traders incorporate the power of various technical indicators,
such as moving averages, to aid in predicting future short-term momentum. In
fact, people who find it difficult to draw trendlines often will substitute them for
moving averages. As you can see from the chart below, a moving average is a
constantly changing line that smooths out past price data, allowing for an
easier identification of support and resistance. Notice how the price of the asset
in the chart below finds support at the moving average when the trend is up,
and how it acts as resistance when the trend is down.
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 Image

Image by Sabrina Jiang © Investopedia 2020

Traders can use moving averages in a variety of ways, such as to anticipate

moves to the upside when price lines cross above a key moving average, or to
exit trades when the price drops below a moving average. Regardless of how
the moving average is used, it often creates “automatic” support and resistance
levels. Most traders will experiment with different time periods in their moving
averages so that they can find the one that works best for their trading time
frame.

Other Indicators
In technical analysis, many indicators have been developed and are still being
developed to identify barriers to future price action. Some indicators are
plotted on price charts, while others are plotted above or below the price.
These indicators can often seem complicated at first, and it takes practice and
experience to learn to use them effectively. But regardless of how complex an
indicator appears, its use and interpretation are often no different from that of
other indicators created through simpler methods like calculating moving
averages and drawing trendlines.
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 1.62
The “golden ratio” used in the Fibonacci sequence, is also observed
repeatedly in nature and social structure. [1]

For example, the Fibonacci retracement is a favorite tool among many short-
term traders because it clearly identifies levels of potential support/resistance.
The reasoning behind how this indicator calculates the various levels of support
and resistance is beyond the scope of this article, but notice in the chart below
how the identified levels (dotted lines) are barriers to the short-term direction
of the price.

Image

Image by Sabrina Jiang © Investopedia 2020

Trading Ranges
Trading ranges can sometimes occur. These are areas where support and
resistance levels are relatively close and the price bounces between two levels
for a period of time. Experienced traders will sometimes trade within these
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 trading ranges, which are also known as sideways trends. One strategy that
they use is to place short trades as the price touches the upper trendline and
long trades as the price reverses to touch the lower trendline. This strategy is
extremely dangerous, and it is much better to wait to see in which direction the
price will break out of the range and then place your trades in that direction.

Support and Resistance Reversals

A previous support level will sometimes become a resistance level when the
price attempts to move back up, and conversely, a resistance level will become
a support level as the price temporarily falls back.

Price charts allow traders and investors to visually identify areas of support and
resistance, and they give clues regarding the significance of these price levels.
More specifically, they look at:

Number of Touches
The more times that the price tests a support or resistance area, the more
significant the level becomes. When prices keep bouncing off a support or
resistance level, more buyers and sellers notice and will base trading decisions
on these levels.

Preceding Price Move

Support and resistance zones are likely to be more significant when they are
preceded by steep advances or declines. For example, a fast, steep advance or
uptrend will be met with more competition and enthusiasm and may be halted
by a more significant resistance level than a slow, steady advance. A slow
advance may not attract as much attention. This is a good example of how
market psychology drives technical indicators.

Volume at Certain Price Levels

The more buying and selling that has occurred at a particular price level, the
stronger the support or resistance level is likely to be. This is because traders
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 and investors remember these price levels and are apt to use them again. When
strong activity occurs on high volume and the price drops, a lot of selling will
likely occur when the price returns to that level, since people are far more
comfortable closing out a trade at the breakeven point than at a loss.

Time
Support and resistance zones seen in longer time frame charts such as weekly
or monthly charts are often more significant than those seen in shorter time
frame charts such as the one-minute or five-minute chart.

Important: Some investors dismiss support and resistance levels

entirely because they say that the levels are based on past price
moves, offering no real information about what will happen in the
future. But all of technical analysis is based on using past price action
to anticipate future price moves; therefore, this is an argument for
dismissing technical analysis entirely.

How Can Identifying Support and Resistance Levels Help

Traders?
Determining future levels of support can drastically improve the returns of a
trading or short-term investing strategy because it gives traders an indication of
where price declines are likely to halt. Conversely, foreseeing a level of
resistance can be advantageous because it will alert traders to be vigilant as the
price approaches this area for a likely reaction in price. As mentioned above,
there are several different methods to choose when looking to identify
support/resistance, but regardless of the method, the interpretation remains
the same: The trader is looking for an indication that the price of a security will
likely react in a certain manner as it approaches and touches a recognized price
level.

How Can Market Psychology Influence Support and Resistance

Levels?
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 Market psychology and behavioral finance can influence where support and
resistance levels occur. Anchoring, for instance, is when people assign meaning
or significance to otherwise arbitrary numbers. A previously established level of
support or resistance may therefore become an anchor at which points future
resistance or support will be observed - even though these points may not
reflect any fundamentals. Likewise, round numbers such as $1,000 or $25,000
may serve as support or resistance levels, not because they are fundamentally-
driven, but are symbolically meaningful as psychological anchors. As these
levels are breached, traders may adjust their anchors accordingly.

What Happens if a Price Breaks Through its Support or

Reistance?
A breakout from a support or reversal can indicate a trend reversal. If support is
broken, that will likely become the new level of resistance. Alternatively, if
resistance is broken to the upside, it can form the basis for support in the short
term.

The Bottom Line

Support and resistance levels are key concepts used by technical analysts and
form the basis of a wide variety of technical analysis tools. The basics of
support and resistance consist of a support level, which can be thought of as
the floor under price, and a resistance level, which can be thought of as the
ceiling above price. Prices fall and test the support level, which will either hold,
and the price will reverse to the upside, or be violated, and the price will drop
through the support and likely continue lower to the next support level.

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Part of the Series

Guide to Technical Analysis

Key Technical Analysis Concepts

1 Technical Analysis of Stocks and Trends Definition

2 Dow Theory

3 Support and Resistance Basics

CURRENT ARTICLE

4 Support (Support Level)

NEXT UP

5 Resistance (Resistance Level)

6 Trend

7 Pullback

8 Breakout

9 Reversal

10 Overbought

11 Oversold

12 Relative Strength

13 Candlestick

14 Volume

15Getting
Gap Started with Technical Analysis
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 Essential Technical Analysis Strategies

Technical Analysis Patterns

Technical Analysis Indicators

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