Support and Resistance is one of the most important and fundamental parts of technical analysis:
- Support: Typically expected that prices should rise after touching support.
- Resistance: Generally expected that prices should fall after hitting resistance.
An example of price respecting support and resistance lines is given next in the chart of the Semiconductor HOLDRS (SMH):
Potential Buy Signal
It is a general expectation that when prices touch a historical level of support, prices will cease the negative momentum downward and reverse course; hence a potential buy signal could be triggered when price touches the support line.
Potential Sell Signal
If prices reach a historical price ceiling (resistance), typically it is expected that prices will stop at that level, unless some other external impetus like great earnings can send prices past historical resistance; therefore, a potential sell signal is triggered when price touches the historical resistance line.
Breaking Support and Resistance
Another fundamental concept of support and resistance is listed next and is shown in the chart below of Alcoa (AA) stock:
- If price breaks below support, then that support level can become the new resistance level.
- If price breaks above support, then that resistance level can become the new support level.
Support and Resistance are basic yet vitally important technical analysis tools.
On every time frame, intra-day, daily, weekly, and monthly, Support and Resistance levels are focused in by traders. Knowledge of these levels could keep a trader on the correct side of the market.
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