Stocks bounce around day-to-day. Even shares that are generally moving sideways never just hold at one particular price. They rise for a bit, then fall for a bit, then back up...back down...etc. This works because, as a stock falls, it gets more attractive to buyers. The price is lower, so more people are willing to buy it.
Eventually, it reaches a level that convinces a large group of people to move into the stock. That buying interest sends the stock higher. People continue to buy until it gets too expensive. At that point, buyers are limited and some of the holders start selling the stock to lock in profits. That selling pushes the stock lower...until, of course, it gets cheap again and buyers reemerge.
The points where the buyers come back into the stock, the price levels that the shares never seem to drop below...that area is known as support. It's like a floor underneath the stock.
Shares drift up from $12 to $15. At $15, the stock seems too expensive for most people. Holders start to sell. It falls back down toward $12. At around $12, people look at it and say, "Hey, that stock's gotten pretty cheap; I don't mind taking a flier on that." They start buying again.
That $12 level is called support. The more times it gets close to $12 and turns back toward the upside, the stronger the support is said to be.
Technical traders look for support levels. In its simplest form, this involves drawing horizontal lines across a chart at points where the stock has reversed course from a downward move, back to the upside. These lines define support. On a more advanced level, there are mathematical techniques to determine more precise support levels.
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Finance: What are support levels and res...0 Views
Finance allah shmoop what Our support levels and resistance levels
All right Support It's a broth for stock trading You
know lifts and separates Sort of our resistance Well you
know how the alien opines resistance is futile Well this
is how new shmoop employees heir born low cost alien
non union labour and nothing like it Okay so let's
look at a few stock charts here Well support level
cleverly named because here you can see support It's a
ziff As soon as the stock touches anywhere close to
this line well it bounces meaningful E up What does
that mean It means that investors have a price at
which the stock is a no brainer bhai and they
all buy it right there So then what about a
resistance level Well kind of inverse here like check out
this little engine that could stock It's trying to break
north higher and higher It thinks it can It thinks
it can There's just too much resistance And it gets
sent back down to the man Yeah well then it
has to chug chug again thinking if can thinking can
think it can't And then resistance So yeah that's resistance
So this is where the collision between fundamental and tech
analysis can emerge or at least drive into each other
You might have a stock that has supported fifteen bucks
and trades as high as twenty for a while But
then it gets beaten back down with its resistance level
touch that traders who control the pricing of a given
stock on any given day will manage its pricing within
that given range But over time the fundamental business or
earnings power or profitability of the company well it wins
out over its short term trading dynamics Fundamental investors might
be the ones doing the buying at fifteen box not
technical chartist that is you might have a stock that
paisa in three percent dividend at twenty dollars a share
or sixty cents a year but fifteen dollars a share
Well then the dividends massive at four percent And with
the dollar in change in earnings it's a steady eddie
stock that investors will buy all day long at fifteen
dollars So in essence the fundamental investors in fact are
the ones providing quote technicals aboard unquote for the stock
at that level And eventually if that stock ends up
growing in producing same three dollars a share in earnings
Well it won't be trading at anything close to fifteen
dollars or twenty dollars anymore It will have broken out
of the resistance level that was operating like gravity keeping
it down you know like the man does so supporting
resistance levels exist in a vacuum within trading days or
weeks and they come in a variety of flavors Other
kinds of support patterns happen as well Here's supporting a
characteristic line and it supports all kind of right there
and well here's support in a double bottom We cannot
lie You know there's a port right there in there
and here you have support in a rectangle But well
note that you also have resistance up here and the
line looks like it's trying to break out of that
rectangular pattern But it's getting resistance and coming back down
And he also see support in other areas like ascending
tops And there's resistance that presses down new highs And
you still have other patterns like well this congestion area
which makes this doc look like a trading sardine where
traders will buy it It's a support line and then
sell it at the resistance line all day long and
make nickels and dimes well The key notion and all
of these supporting resistance style charts is that patterns work
until they don't So check out this very decisively resistant
top in this triple top pattern It's like the line
just can't break out of it Ah ever But if
you check out the breakout pattern in this breakout chart
yes there was resistance until the company produced a dollar
eighty three and earnings when everyone thought it would only
produce a dollar forty and then blame Oh the stock
breaks out to a new high level at which point
all bets are off and the pattern picking charters take
their losses from having been short the stock of the
top And then they go hunting for some new pattern
religion Sat words don't don't trust charts