Support and Resistance:
Support is the price level at which demand is strong enough to prevent the price from declining further. At this level demand overcome supply and prevents the price from falling below support. When support level is broken, it means that bears have won over bulls. Support taken at a particular level repeatedly forms a support zone which is not easily broken, but volatile price movements can lead to support levels to be broken briefly. Sometime the support level break is not logical till the price closes 1/8 below the established support level.
Resistance is equivalent to “supply” line. When selling occurs repeatedly near specified level, resistance forms at that price level. When a resistance level is successfully penetrated that level becomes a support level. Similarly when a support level is successfully penetrated, that becomes resistance level. The advantages of support and resistance level can be taken, when stocks form some patterns, when one buys at supports and sells at resistance levels.
Supports and Resistances can be used to forecast trends. Trader’s expectations are directly reflected in support and resistance levels. When investor’s expectations change, a breakthrough in support (in a downward trend) or resistance (in an up-trend) occurs. If traders expect prices to go up, a breakthrough in the resistance level will occur and the support level will be raised. This is reflected on a chart with successive low point higher than the previous and each successive high point higher than the previous.
If investors expect prices to go down, a breakthrough in the support level will occur and the resistance line also will be lower. If expectations continue to go up and a breakthrough in resistance shows a new upward trend, a new resistance level will be established and the old resistance level will eventually become the new support level. If expectations continue to go down and a breakthrough in support level shows a downward trend, a new support level will be established and the old support level will often become the new resistance level. There are several short range up and down trends.
Low points are consistently lower and high points are consistently lower during the downward trends. Low points are consistently higher and high points are consistently higher during upward trends. The trend went up and continued, creating a new resistance level. The old resistance level has now become the new support level. The longer prices trade within an area the greater the opportunity for prices to penetrate either the support or resistance line. For Example, if the prices are the same for several days and then breakthrough the resistance line, its likely the price will go back within the support and resistance area. However, if prices remained within the support and resistance area for several months, i.e building a stronger base, its likely that prices will follow the long-term trend either up or down.