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Stock Support and Resistance
Perhaps the most basic skill needed by a trader who plans to use technical analysis to base buying and selling decisions is the ability to identify critical levels of support and resistance. Finding these important price points on a stock chart will give stock market aficionados an indication that a stock could be reaching a critical point, either to the upside or the downside, and may indicated a reversal in direction.
The support level on the stock chart can be identified as the price at which the stock does not drop below over a period of time. The people who buy the stock start to outnumber the sellers, which causes the stock's price to stop falling and become stabilized.
The support level is viewed as the floor of a house. Just as it takes a dramatic act to drop through the floor of a house, it takes a dramatic act for a stock to break its support level. (Sometimes, as in the bearish market of 2008, the prevailing attitude of the market was so bearish that many support levels were shattered by stocks as they fell toward the bottom.)
The resistance level on the stock chart is the price at which the stock does not surpass over a period of time. Those who sell the stock begin to outnumber the buyers, which signal's the stock to top rising and turn the other way.
The resistance level can be thought of as the ceiling of a house. If you bounce a ball off the floor, it will find resistance as it approaches the ceiling and falls back toward the floor. Like the support level, it will take a dramatic act for a stock to break its resistance.
One critical place were stocks begin to find added resistance is around the $100 level. If a stock can break through $100 on the price level, it may be ready to zoom to the next level and establish new levels of resistance. A stock may often attempt to crash through $100 before it succeeds.
In an odd turn of events, once a stock breaks through its support level, that price point will often become the new resistance level. Likewise, when a stock breaks through its resistance level, that price point will often become the new support level. The saying is, "Old support becomes new resistance and old resistance becomes new support" is usually very true.
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