Support Lines and Resistance Lines Technical Analysis
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.
