Support & Resistance

Support and resistance levels are important points in time where the forces of supply and demand meet. These support and resistance levels are seen by technical analysts as crucial when determining market psychology and supply and demand. When these support or resistance levels are broken, the supply and demand forces that created these levels are assumed to have moved, in which case new levels of support and resistance will likely be established.

Support, as the name implies, indicates a price level or area on the chart under the current market price where buying interest is sufficiently strong enough to overcome selling pressure. As a result, a decline in price is halted and prices are turned back up again.

Resistance is the opposite of support. It represents a price level or area above the current market price where selling pressure may overcome buying pressure, causing the price to turn back down against an uptrend. It should be emphasized that an existing prior high does not imply that subsequent rallies will definitely fail at or below that high with pin-point accuracy, but rather that resistance could be anticipated in the general area.

When the resistance (support) is violated, the term used is breakout. The breakout is confirmed if the price does not retrace back immediately within the support/resistance level.  A false breakout happens when the price crosses the resistance(support) for a very short time and finally continues within the resistance (support) levels.

The supports and resistances are subjective concepts and need a good ability to be identified. However, there are some guidelines that make it possible to identify these particular price levels with greater certainty. In particular, the reliability of a support or resistance increases when:

- when the volumes are very high
- the number of times they are touched without being violated
- they are relative highs or lows of the market
- they are absolute highs or lows of the market
- they are round figures (eg 6500, 40000)

A support (resistance) level which is broken will automatically become a new level of resistance (support). This is called the change of polarity principle. As we can see from the chart below, the resistance level (blue dot) has been broken and was then transformed into a support level (red dots).