Simple Support and Resistance

Probably the easiest and most used method in technical analysis is the idea of support and resistance. Technically every stock analysis could work using support and resistance since it is the building blocks of more advanced patterns.

Official Terminology

Support – The price level where a particular stock has had trouble falling past. At this certain price, the stock has bounced off the “invisible floor or support.” An eventual break of the support usually results in a sell signal or short order. A bounce can lead to a good buy opportunity.

Resistance – The complete opposite of support. Resistance is a level at where the stock has historically had trouble going above. Think of it as an “invisible ceiling or resistance.” Resistance is usually a level for sell targets or possible entry point (barring a break of the price level). Unlike support, an eventual break of the resistance will result in a buying opportunity and a bounce would lead to a sell or not entering a position.

Overall Concept

Support and resistance can come in straight or slanted line. The more failed attempts at breaking the line and the longer time frame it spans across the better.

Breaks of these price levels usually create some sort of call to action. For example, you can limit your risk by setting buy targets. If Stock A sits at $10 and there seems to be some sort of resistance at $12, then it would be common for many to set a buy target somewhere right around the break of $12. This minimizes the risk by not having to worry if Stock A is going to $11.59, and then heading back down. The stronger the volume on the break, the more convincing that break will be.

At the same time many traders use resistance as a sell point. They feel the stock will continue to see resistance at $12 or they just might want to take profits at a good time. Either way these are both great choices to limit your risk.

Hopefully by now you then understand what breaks and bounces mean for support. Support price level could be used for many different things. If somebody feels they just have to get into Stock A at $10, then they might make a note to themselves that this trade is a bust if it goes past the support. In this example, we will say its $9.00.

Quick Check: What would happen if Stock A bounced at $9.00?

Answer: It would be an entry point followed by a price target of $12 (that is our resistance).

To limit risk, many traders don’t like to enter a stock unless it sits at some point of resistance or support; however, just like many things dealing with the market everybody has their own perceptions. What some might consider a support, resistance, or a break of one another might not. This obviously factors in the potential for error or inconsistencies in certain breaks and bounces.

Concept In Action

By looking in the chart below we can see a very simple form of support and resistance for stock symbol PAYX. It is common for many stocks to ride within a zone or trading range. By using resistance and support bounces, many are able to profit off this.

The neon green line marked “minor resistance” is an area that could cause some problems; however, we have to remember our time frame. If we were to zoom in closer and look at a shorter time frame, then that minor resistance might be more effective. That is why it is important to remember the rules and notes below.

Important Reminders and Notes

• The stronger the volume on a break of support or resistance; the more likely the stock to continue past that certain price level.
• When acknowledging a support and resistance: the longer time frame it spans across; the more significant a break of the resistance or support is.
• The more failed attempts to cross a certain support or resistance; the more significant a break of the resistance or support is.
• Once a resistance is broken that becomes the support; once a support is broken that becomes the resistance.

Again, support and resistance are major players in the world of technical analysis. If you can understand this concept of support and resistance, then you should have no problem picking up other chart patterns and technical analysis.