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.

More on Cabot Technical Analysis
Sign up for free Cabot Wealth Advisory e-newsletter

Stock Picks

Loews Corp.

This undervalued stock has strong future earnings growth expectations.


Biogen is the market-share leader in treating multiple sclerosis.


One of Paul Godwin’s favorite stocks in his Cabot Emerging Markets Investor portfolio.

Cabot Wealth Advisory

Does Alibaba (BABA) Stock Measure Up to Amazon (AMZN)?

By Paul Goodwin on September 23, 2016

Alibaba (BABA) is the Amazon (AMZN) of China. But does BABA stock measure up to AMZN stock? Let’s break it down!Read More >

As Stock Market Trends Change, Invest in these New Leaders

By Michael Cintolo on September 22, 2016

History tells us that all stock market trends change, and if you don’t recognize the leaders of that change early, you risk missing out on the next big winners.Read More >

AMZN Stock vs. FB Stock: Which Is the Better Value Buy?

By J. Royden Ward on September 20, 2016

For the past five years, AMZN stock and FB stock have been two of the market's great growth stories. But could you make the case that either stock is still undervalued? Let’s break it down.Read More >