You hear that a market index or stock “finds” support—meaning buyers started purchasing in a certain price area. You also hear that prices “bounced from” support—this is often referring to a prior low or series of lows—or that prices “held” support. When support is “broken” it refers to prices exceeding a prior low or series of lows—there is a downside penetration of the support area as willing buyers withdraw, and/or sellers offer more than all buyers want, so prices fall if the sellers persist. A test of support is that prices go back to a prior low. A successful or failed test of support is determined by whether buyers again come in to buy and prices rebound from the support area or not. Support is always an implied aspect to price levels.
“Resistance” is just what is implied by the word, a price area where sufficient selling develops to push prices lower and to resist the buying pressure. Resistance is a price level at or above the current level of an index, stock, or other financial instrument. Resistance is often a prior upswing high or series of highs. Prices also “bounce off from” resistance or are deflected by, or “turned back” and “fall back” from it. A common statement is that a rally “failed” at resistance, or an advance failed to “take out” resistance— meaning that prices fell once they got into the area of a prior high. These are some of the terms that are bandied about.
The important thing to remember about resistance is that it was an area where holders of the stock or other financial instrument found it attractive to sell previously—enough so that their selling overwhelmed willing buyers, so to speak. If it was attractive once to sell in this area, it may well be again. A push through resistance is where prices rise above the prior low or series of lows. You also hear for example, that a stock “overcame” resistance in a certain price area.
Areas of stock support indicate a price(s) where a stock is being accumulated by buyers, hence the term accumulation to refer to this process. A particular price support area may be said to be an area of long-term accumulation. Areas of accumulation are areas of support, as there is buying interest there. Stock market bottoms occur when some savvy buyers begin to accumulate stocks, anticipating an end to the decline.
Areas of stock resistance indicate a price(s) where a stock is being “distributed” (sold) to other willing buyers, hence the term distribution for this process. Areas of distribution are areas where previous owners of a stock are willing sellers. Stock market tops tend to begin forming when some of the more savvy holders of stock begin to sell their holdings. You may hear terms like “distribution tops” to describe this process.
Read More : Highs Lows And Support Resistance Define Trends
