Technical Analysis – Chapter 4

0
231

Support and Resistance Prices: Support and Resistance prices are few of the most commonly used terms by any technical analyst. In simple words, Support and Resistance are key junctures where forces of Supply and Demand of stocks meet.  In Stock market prices and drive by supply and demand; a very basic concept of economics.

As demand increases prices goes up and vice versa. But when supply and demand are equal; sellers and buyers or better to say bulls and bears fight it out for control.

Support and Resistance for a stock can understood from the perspective of price and volume. In this article we would try to understand keeping price as main criteria.

What is Support? Support is a price level at which demand is thought to be strong enough for the price to decline further. At this price demand for stock is more than supply of the stock.  As the price moves towards support level, buyers become more interested in buying whereas sellers become less interested to sell. At this price, it is believed that demand will overcome supply and prevent the price from falling below support.

 What is Resistance? Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further. Basic criteria is, as the price moves towards resistance level, sellers become more interested to sell and buyers become less interested to buy. At this price, it is believed that supply will overcome demand and prevent the price from rising above resistance.

Parameters affecting the strength of Support and resistance level:

  1. Length: The longer the period of a trend stronger the support and resistance level.
  2. Height: Broader the distance between support and resistance level more stable the trend is.
  3. Volume: Higher the volume of trade stronger the current trend will be.

Breakout and Role Reversal: Market sentiments do not remain same all the time and could change depending upon lots of factors like a new contract for the company, merger and acquisition or some kind of sanctions. There could be any number of reasons for optimism or pessimism within market. This over exuberance for a stock or overtly bad sentiments for a company could result into breakouts; where in prices cross the resistance and support level and either rise above the resistance level or fall below the support level.

Once prices crossover the resistance or the support level then there would be a role reversal of support and resistance prices. If price of stock rise above resistance level then old resistance level becomes the new support level whereas if prices fall below the support level then old support level act as resistance level.

The only catch is that the reversal needs to be a true reversal rather than a false breakout or breakdown, which generally means that it’s accompanied by significant volume and a price spike.

Next article we would understand support and resistance level based on volume.

 

LEAVE A REPLY

Please enter your comment!
Please enter your name here