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[S1166]Support And Resistance Lines

by Sylvain Vervoort, Syl

Stock prices move in waves. This undulating price picture with tops and bottoms occurs because, at a certain level, the price experiences support or resistance. At a bottom, the price is supported by sufficient buyers, and it bounces up again. At a top, the price is pushed down by large selling pressures.

The price level of a share has everything to do with supply and demand forming the resistance lines and support lines. For a given increase in price, there are a number of buyers and sellers. A price increase will attract more sellers, but the number of buyers will decrease. A resistance line forms at a balance in sellers and buyers.

A broken resistance line automatically becomes a support line for future price levels. Horizontal support lines and resistance lines are drawn through turning points in price (pivot points) or a price window or gap. A confirmation is given if the price turns against this line. A support or resistance line is broken if crossed with the closing price.

As already mentioned price finds support and resistance when there are gaps or windows visble in the price behavior. We talk about a rising window if the lowest price today is higher than the highest price of yesterday, while a falling window occurs if the highest price today is lower than the lowest price of yesterday. Windows constitute important support and resistance levels. The entire area of a window represents support or resistance. The support or resistance of a window is broken only if crossed with the closing price. The height of the window has no importance.

It can be worthwhile to pass on support or resistance from a lower time frame like, for example, an hourly price chart to a chart with daily prices (or visa versa). A certain support or resistance area is possibly a window in the hourly price chart, but it is not visible on the daily chart.

Turning points at a support or resistance level often are confirmed by candlestick reversal patterns.

Buying at a support level is a very good opportunity for buying at a very good risk-to-reward ratio. Mostly you can keep a very close stop at the support level. Because, don't forget, there is always the possibility that the price will move the other way. Then you will have to sell as soon as the closing price falls below the support level.

Support and resistance levels are a very important part of the decision-making process to buy or to sell stocks and can be used on all time frames. Confirmed support or resistance has great influence on the buying decision, while breaking support or resistance will trigger selling signals.

Another level of support and resistance is given by trend lines. A trend line is a straight line that connects two or more price points and then extends into the future to act as a line of support or resistance.

An uptrend line has a positive slope and is formed by connecting two or more low points. Uptrend lines act as support. As long as closing prices remain above the trend line, the uptrend is intact. A break below the uptrend line indicates a change in trend for the period being considered. A stock price closing below the uptrend line is a selling signal.

A downtrend line has a negative slope and is formed by connecting two or more high points. Downtrend lines act as resistance. As long as closing prices remain below the downtrend line, the downtrend is still valid. A break above the downtrend line indicates a change of trend for the period being considered. A price closing above the downtrend line is therefore a buying signal.

Why is support and resistance important? People don`t pay much attention to the people and objects that play supporting roles. But, where would a house be without it`s support beams? Where would the leading actor be without his supporting cast? Well, the first one would be a wreck, and the second one, would likely be a wreck as well. Not knowing how to use a commodities support levels can wreck havoc in your trades as well.

Every commodity has support and resistance levels. A support level is a price at which the position has previously bounced and reversed a downward course. Think of it as a potential floor in the commodity`s prices. The reason it`s so important to set stops below support is that positions moving downward tend to bounce upward around their support levels. Afterwards they may begin to move downward again, breaking through support, and move even lower. A clear break below support is dictated by where a position closes, not by intra-day swings.

Alternatively, after bouncing off support, a position may continue to move upward, never returning to the support level at all. The one fairly specific rule in setting stop sells, the science part of setting them, is that you should not set them either right on the position`s support level or just above support. Instead, unless the support level is so low that stopping out there would loose you too high a percentage of your capital, set stops below support.

It doesn`t make sense to set a stop right at support because the position is almost certain to bounce up from that point, possibly reversing course. If you set your stop below support, it probably won`t be triggered unless the position has broken support and will continue downward. The key to setting stops that work is to use the support levels that exist for a commodity. The same principle applies for a stop buy-to-cover on a short position: Set your stop above, not at or below, resistance. A resistance level is a price at which the commodity has previously reversed its upward course. Think of it as a potential ceiling.

You can use resistance levels to help set your trailing stops by remembering that they often become support levels once they have been broken through. When the time comes to use trailing stops to lock in your profits, you can place your stop below what used to be the resistance level, expecting it to act like a support level.

What`s so special about the prices that act as support and resistance points? Is there something all the insiders know about the company`s valuation at those levels? Do they give some clue as to the real value of the company? Unfortunately, they don`t.

There`s absolutely nothing special about a number like 13 dollars or 65 dollars or any other price that is a support or resistance level for a commodity. They`re more like self fulfilling prophecies. Everyone in the market, from mutual fund managers to market makers to you, is looking at the same charts, and coming to the same conclusions.

Everyone expects commodities to bounce off support because the support and resistance levels are a price that is identifiable. The reason it has significance is because it is identifiable, and everyone reading the charts will identify it. Because everyone expects the commodity to bounce off support, it usually will.

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Both Sylvain Vervoort & Jimmy Cox are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

Sylvain Vervoort has sinced written about articles on various topics from Finances, Education and Finances. Want to learn more about technical analysis? You can find a lot of material about basic technical analysis techniques for free at my website: under the Techn. Sylvain Vervoort's top article generates over 1000 views. to your Favourites.

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