Support & Resistance

Support & Resistance

Support and resistance represent key junctures where the forces of supply and demand meet. In the financial markets, prices are driven by excessive supply (down) and demand (up). Supply is synonymous with bearish, bears and selling. Demand is synonymous with bullish, bulls and buying. These terms are used interchangeably throughout this and other articles. As demand increases, prices advance and as supply increases, prices decline. When supply and demand are equal, prices move sideways as bulls and bears battle it out for control.

The definition of support:

Support is the price level at which demand is thought to be strong enough to prevent the price from declining further. The logic dictates that as the price declines towards the support level, buyers become more tempted to buy and sellers become less tempted to sell. By the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below the support level.

Support levels do not always hold and a break below support signals that the bears have won out over the bulls. A decline below the support indicates a new willingness to sell and/or a lack of incentive to buy. Support breaks and new lows signal that sellers have reduced their expectations and are willing to sell at even lower prices. In addition, buyers could not be persuaded into buying until prices declined below the support or below the previous low. Once a support is broken, another support level will have to be established at a lower level.

The definition of the resistance:

Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further. The logic dictates that as the price advances towards resistance, sellers become more tempted to sell and buyers become less tempted to buy. By the time the price reaches the resistance level, it is believed that supply will overcome demand and prevent the price from rising above the resistance.

Resistance levels do not always hold and a break above a resistance signals that the bulls have won out over the bears. A break above a resistance shows a new willingness to buy and/or a lack of incentive to sell. Resistance breaks and new highs indicate buyers have increased their expectations and are willing to buy at even higher prices. In addition, sellers could not be persuaded into selling until prices rise above the resistance or above the previous high. Once a resistance is broken, another resistance level will have to be established at a higher level.