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.
For 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.