What are support and resistance lines?
Support and resistance lines appear as thresholds to price patterns. They are the respective lines where prices stop going down or up.
A support line is the level that a stock's price generally does not fall below. It marks the price level at which there is a sufficient amount of demand to stop and possibly, for a time, turn a downtrend higher. A resistance line is the level above which a stock's price generally will not rise. It indicates a price level at which a sufficient supply of stock is available to stop and possibly, for a time, head off an uptrend in prices. Trend lines are often referred to as support and resistance lines on an angle.
Why do support and resistance lines occur?
A stock's price is determined by supply and demand. Bulls are buying when they think a stock is priced too low. Bears are selling when they think prices have peaked. Bulls bid up the price by increasing demand, bears take it down by increasing supply. When the bulls and bears find a price point they can agree on, the market reaches a balance.
When prices are trending upward, there's a point at which the bulls begin to pull back and the bears become more aggressive - the market balances along the resistance line.
When prices are trending downwards, the market balances along the support line. As prices decline toward that support line, buyers become more inclined to buy and sellers starting holding on to their stocks. The support line marks the point where demand takes precedence over supply and prices will not fall below that support line. The reverse holds true for a resistance line.
Prices often break through support and resistance lines. A break through a resistance line shows that the bulls (the buyers) have won out over the bears (the sellers). The bulls are determined to bid the price of the stock higher than previous highs. Once the resistance line is broken, another will be created at a higher level.
The reverse holds true for a support line.
Support levels can transform into resistance levels and vice versa. After prices break through a support level investors may try to limit their losses by selling the stock, pushing prices back up to the line which now becomes a resistance level.
Why are support and resistance lines important?
Technical analysts often say that the market has a memory. Support and resistance lines are a key component of that memory.
Investors "tend to remember previous area levels and thus make them important. While a stock is changing its price level rapidly, day after day, the public will be buying and selling at widely divergent levels and there will be no unanimity, or strong memory impression, in such changing prices." But, when prices form an "area" and trade within a fairly narrow range for a period of time, investors begin to remember that specific price.
The longer the prices stay in that area and the greater the volume in that spot, the more important that level becomes because investors remember it exceptionally well. Therefore, that level takes on added significance for the technical analyst. According to experts, previous support and resistance levels can be used as "target" or "limit" prices when the market have traded away from them.
Investors should be aware that support levels are usually below the current price; resistance levels are often above the current price. Also, it is not unusual for prices to move below or above a support or resistance level for very short periods of time during a volatile trading period.
Support and resistance levels are important tools for the technical analyst. By monitoring whether a stock's price is nearing a support or resistance level, an investor will be aware of whether a reversal may be in the offing. Together with monitoring the proximity of the price to the support or resistance level, a vigilant investor will also monitor trading volume in the stock. Increased volume is another key sign that a reversal may be at hand.
Let's take for example the SP500
Monthly Resistance
Daily Line Chart Support
I am floored and amazed at your skill and uncanny intuition on this pull back and today's rally.
ZK 11/28/07
This seems to fit right in with what JL has told us. This down move, another leg up then down again where we develop our shorting skills. At least that's what I recall.
From what I've gleened, during a secular bear there will be moves to the upside but they won't go as far as the moves to the downside so the market continues to trend down.
It's not as scary now as it was when I went through the last crash. Partly because I wasn't as wise and mostly because of T123 guidance.
It's simply amazing to me that one can profit in the market as much during bad times as good times. Now I know how lawyers feel (just kidding).
Should be some interesting times ahead. Glad I'm here at T123 to not only get the scoop but to profit from it.
Bob 11/22/07
