Support and Resistance Levels
History Tells Us When Securites are Overbought or Oversold
Support indicates a level on the chart where we can expect an increase in the
demand for a security (buyers take over). How do we know this? By identifying
this reaction to a price level in the chart's history.
If we look at most
charts, we see that there are certain levels where selling pressure subsides
and the trend will shift as price increases. When this happens, we can assume
that this level will retain its significance when price approaches it again.
This is known as support, as the securities price is supported at this level.
Conversly, resistance is the level where the securities price has shown an
inability to rise anymore, and a reversal to the downside can be expected.
As we see price approach
these levels, we can usually expect a revesal in trend. However, what if
price exceeds these levels? This is still a tradable situation. A break of
these levels mean that current market conditions have pushed price beyond a
historical reversal point, and a continuation of the current trend can be
expected.
Also, it is important to
remember that when one of these levels is broken, they will often
"change roles" and behave as their counterpart. For example, if
price sufficiently moves through a support level, this level still has
significance and it should now be viewed as a resistance level.
Practice identifying
support and resistance levels when you are looking at charts. They are easy
spot, easy to understand, and paramount when making trading decisions.
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48 is clearly a
Resistance Level for NEU
SOL shows solid
Support at 10.5
The Support break by
FON means that 19 should be viewed as potential Resistance in the future
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