Support and Resistance

Support and resistance can be extremely important when deciding to buy or sell a stock. In a nutshell, support is a price at which buyers step in and arrest a decline. Support is typically found at a level where a bottom was formed during a previous decline. Remember, stocks have memories!

Resistance is the inverse of support. It can be found at a previous high. When a stock is powering ahead, the advance may be halted (temporarily or permanently) at the high-water mark of a previous advance.

Support and resistanceFor clear examples of both resistance and support, glance at the price chart in figure 3. Notice how the stock had difficulty decisively breaking out above the $250 level at point A. That was an area of resistance.

After the failed attempt to break out to new highs beyond $250 (point B), the stock sank to a level of around $110 at point C. Because the decline was halted at that level, you could say that the stock “had support around $110.” At point D, there was a successful retest of the support level. It was successful because the stock bounced off that level and headed significantly higher.

Generally speaking, the more times a support/resistance level is tested, the weaker it gets. In our example, the support level at $110 was broken in November (point E), at which time the stock dropped to around $85.

Support and resistance are not exact points. Rather, they are “areas.” Think of them as a fence that can be leaned on. So if a stock’s decline were halted at exactly $100, its support level would be around $100.

One final point about support and resistance: if they are convincingly broken, they switch places. In other words, if a stock breaks up through resistance, that resistance level becomes support.

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