Shares Support and Resistance Levels

Learning to incorporate support and resistance lines into your share investing and trading decisions will be a very useful technical tool in your arsenal. Support and resistance levels often act as floors and ceilings holding price in well defined channels until it gains enough bullish momentum to break out to the upside, or enough bearish momentum to breakout to the downside.

Resistance

Drawing a line that connects all the highs along the same approximate price level will create what technical analysts describe as a resistance level or resistance line. At this level the market is resisting going any higher because there is more supply than demand at this price level, so traders enter the market and are net sellers of shares at this price.

If the price were to break through this resistance as it has in the second diagram to the right, it could indicated that the selling pressure at this price has subsided because supply has fallen, demand has picked up or both, likely due to the release of good news or anticipation of good news, in any case when price breaks through a support level it means sellers have backed off for some reason and the stock is gaining bullish momentum. Technical analysts typically see a break of resistance as a buy signal, especially when it occurs on strong volume and with supporting fundamental factors.

Support

Drawing a line that connects the lows along the same approximate price level will define a level that technical analysts call support. The price is supported from going any lower by the presence of buyers at this price due to increased demand, decreased supply or both, likely due to positive economic news being released or that is anticipated to be released. Every time price falls back to a support level the bulls emerge and provide sufficient buying pressure to absorb the selling and prevent price from breaking down through support.

Let’s assume that the price does break through support. What exactly does this indicate? The first conclusion to make is that buyers at this previous support level are no longer in the same quantity they were before. Now that the buying has dried up, the selling is continuing to escalate and drive prices lower, this selling at lower prices suggests that the bears are becoming more aggressive. This typically happens because of an increase in supply, a decrease in demand or both, likely to due to poor economic news that has been released or that is anticipated to be released.

Volume

Volume is an important tool for the share market technical analyst. Rising volume at the time of a break of support or resistance is generally regarded as further confirmation that the break is legitimate and that the price is expected to continue moving in the same direction. The factors behind higher volume contributing to confirmation of a legitimate breakout are varying. For example, higher volumes suggest more sophisticated and knowledgeable investors and traders might be establishing positions in the direction of the dominant market momentum, or it could be simply because more individuals are discovering that fundamental factors are aligning and are making this particular share a hot share to buy and the investment is looking more and more attractive to more market participants.

Check back soon for our next technical analysis tutorial lesson in which we will discuss chart price patterns.