Explanation: Resistance and Support

Have you ever watched a stock price chart, and it seemed like it was stuck near a certain price?

Of course, it really isn't, but when you watch the prices, it feels that way.

Pure fundamental investors HATE any discussion that involves buying and selling stock based on the price patterns. It's illogical, and they're right--to a point.

True technical traders, on the other hand, vehemently insist that the markets are ruled entirely by the price charts. Most of them say that history repeats itself. Of course, even some of the best technical traders admit that's not always true.

Fundamental investors believe that a stock's price SHOULD be based upon the company's fundamental finances and industry position. They're probably right. Prices SHOULD reflect these.

However, the market is a response by other human beings, an emotional lot. Think people's PERCEPTIONS of the company affect the stock's price? Want to bet against that one? I sure don't!

So I will acknowledge that fundamental investing is intelligent but not complete.

So let's explore a couple of simple concepts of technical trading.

Resistance
You know when you see a price level of a stock start to rise and rise, and suddenly, it seems like it hits a wall? It just won't go any higher?

The stock drops a bit, but it rebounds--only to be interrupted by that same price. It might even tip a little above it, but it won't be for long. The price drops...again!

THAT price level is called resistance.

Notice the the price level--for this particular stock--never fully blasts past the $5 mark.

So for this stock, $5 is the resistance level. One day, it might pass it, but for now, it seems like too many people have a hard time buying this stock above THAT level. (They RESIST buying it above that price.)

Support

Support works the same way, but in the opposite direction.

Instead of being called resistance (or resistance level), it is called support (or support level).


Notice the the price level--for this particular stock--never fully drops below the $26 mark.

So for this stock, $26 is the support level. One day, it might pass it, but for now, it seems like too many people have a hard time selling this stock below THAT level. (The stock price is SUPPORTED by this price--for now.)

Important Note

Resistance and Support Levels are important to notice; however, they are NOT guarantees. People's feelings change often, and you cannot ever know, for sure, how the majority of people will respond to news, what their friends say, or their overall impressions of the company or industry.

This author suggests that this should GUIDE you. You should NOT RIDE IT. You still need to think for yourself.