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If past history was all there was to the game, the richest people would be librarians.
~Warren Buffett
Essential Technical Analysis - Table of Contents
Trading and Investing, Strategic Considerations
Technical Analysis - Introduction
The Market Variables: Direction, Momentum, Volatility, Liquidity, Volume
Market Trends, Highs and Lows
Impulsive vs Drifting Price-Action
Volatility Expansion
Support and Resistance
Candlestick Patterns
Summary
Support and Resistance
Think of security prices as the result of a head-to-head battle between a bull (the buyer) and a bear (the seller). The bulls push prices higher and the bears push prices lower. The direction prices actually move reveals who is winning the battle.
Support is commonly defined as "a price level or area at which the demand for a stock will likely overwhelm the existing supply and halt the current decline." Resistance is defined as "a price level or area at which the supply for a stock will likely overwhelm the existing demand and halt the current advance."
The trend line is also the first point of support and resistance. Projecting a trend lines to determine future support and resistance areas is extremely effective. As the charts in the trend line discussion illustrated, a trend line along the lows in an uptrend or across the highs in a downtrend is a key barrier for prices to cross if the market is to change trend direction.
There are other types of support and resistance. One of the favorite methods for determining support and resistance levels is to look at a bar chart and its past price history and then see at what price levels the highs, lows and closes seem to be the most. This method of determining support and resistance levels works on any bar chart timeframe – hourly, daily, weekly or monthly. Many times a bunch of highs or lows will be concentrated in a small price area but not at one specific price. Instead, you have a support or resistance "zone" that should be rather narrow to be effective.
Major price tops and bottoms are also major resistance and support levels. Unfilled price gaps
on charts also qualify as very good support and resistance levels. Moving averages, especially
longer-term ones, can also provide support or resistance.
Watch a Video on Support and Resistance