Support and Resistance forms the basis of all Technical Analysis what can be set by watching price movement history or chart. Where:
- SUPPORT is any point at which a falling price meets enough buyers to stop the fall
- RESISTANCE is any point at which a rising price meets enough sellers to stop the rise
The more times a price meets support or resistance at the same level, the stronger that support or resistance is. As you can see in sample image – the more price touches that level the more is conviction of support or resistance.
In this sample we can see a rising price. It meets Resistance, fails to move higher and comes back down and forms a Support. The more it touches the more significant it gets.
Afterwards we see buyers getting more aggressive and the price finally breaks through the resistance and climbs higher until buyers start to sell their profits and price forms a new resistance point. Short sellers see the opportunity and push the price back down until it reaches previous resistance what now buyers are using as a support level and push the price back up. Until it meets previous high, fails to move higher and creates lower high what can be used as a resistance level now.
Why does it happen? Not everybody sees lines there…
Just enough people have the same opinion that collectively they are causing the price to change direction at the same place. And if this happens a few more times, more people will notice and will make the same conclusion. What means even more potential buyers or sellers at these support and resistance levels.
Lets go over to some more samples
Here you can see AAPL daily chart and price action. From May to June you can see resistance forming. Buyers are still trying to push the price up until they got exhausted, do to some bad news probably, and price started to fall. Now you can see sellers stepping in and trying to push the price lower, but not long after buyers again try to take over and chart forms support. More it touches support level and don’t go through, more convinced are buyers to push the price up.
I have marked some of resistance and support levels in colours for better understanding.
Sometimes it’s not enough to see support and resistance levels on one time frame so you look at bigger picture. Like this AAPL weekly chart. Where you can see biggest and strongest S and R levels.
Daily chart of TSLA
Also volume can be used as confirming indicator of a breakout from support or resistance. If a break is accompanied by rise in volume, its more likely to carry through. A break on thin volume might indicate that just some few trades got over the S or R levels and can stop and reverse once again.
I hope this post was helpful and if you got some questions, please leave them in comments section.
Thanks for attention.
Adding one of the recent trades of OPTT, where you can see how previous support becomes as resistance.