Support and Resistance is among the most important concepts of Technical Analysis. S&R helps to take buying and selling decisions.
Usually Support is a price range where the stock price reverses, after the fall. More times the stock price have reversed, stronger the support. Support is a levels where demand overcomes the supply, thereby preventing the further fall and ultimately reversing the price. Similarly, resistance is the price range from which the stock price reverses for a down trend. This is a level where selling is strong which prevents the share price to move up, eventually taking it down or sideways.
- Break out happens when stock price moves beyond resistance levels.
- Break Down happens when stock price falls below support levels.
S&R is the most important zones for a stock to be in, after which reversal happens. It’s very important to consider the prior trend before taking a decision on basis of support and resistance. A downtrend is usually hallmarked by lower tops and lower bottoms whereas uptrend is hallmarked by higher high and higher bottom.
Reversal of Resistance as Support
Once the stock price moves beyond resistance, the resistance levels then becomes immediate support. Similarly, when stock price breaches a support, the support line then becomes immediate resistance.
Traps – False Break Out or Break Down
|2||Increase||Decreases||Caution – weak hands buying|
|4||Decreases||Decrease||Caution – weak hands selling|
Most investors look for support and resistance for entry and exit decisions. At times there are false breakouts or break downs which act as traps and a successful investor always knows how to avoid such traps. Identifying a trap includes detailed understanding of business, economic factors, business cycle, business performance and business ratios like PE and EPS.
Volume is the total number of shares traded in a given single day, A true break out or break down is mostly accompanied with high volumes. Average volumes of last 10 days is taken into consideration.