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--- chart_analysis:support_and_resistance [2019/06/24 19:38]
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+++ chart_analysis:support_and_resistance [2023/09/12 19:29] (current)
jayanthi [The Bottom Line]
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 ====== Support and Resistance ======
-===== Introduction =====
+===== Support and Resistance—In Simple Words =====
-Support and resistance represent key junctures where the forces of supply and demand meet. In the financial markets, prices are driven by excesses of supply (down) and demand (up). Supply is synonymous with bearish, bears and selling. Demand is synonymous with bullish, bulls and buying. These terms are used interchangeably throughout this and other articles. As demand increases, prices advance and as supply increases, prices decline. When supply and demand are equal, prices move sideways as bulls and bears slug it out for control.
+Support and resistance represent key junctures where supply and demand meet. In the financial markets, prices are driven by excesses of supply (down) and demand (up). Supply is synonymous with bearish, bears, and selling. Demand is synonymous with bullish, bulls, and buying. These terms are used interchangeably throughout this and other articles. As demand increases, prices advance, and as supply increases, prices decline. When supply and demand are equal, prices move sideways as bulls and bears slug it out to gain control.
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 After Lucent declined, a trading range was established between 40.5 and 47.5 for almost two months (green oval). The resistance level of the trading range was well marked by three reaction peaks at 47.5. The support level was not as clearly marked, but appeared to be between 40 and 41. Some buying interest began to become evident around 44 in mid- to late-February. Notice the array of candlesticks with long lower shadows, or hammers, as they are known. The stock then proceeded to form two up gaps on 24-Feb and 25-Feb, and finally closed above resistance at 48. This was a clear indication of demand winning out over supply. There were still two more opportunities (days) to get in on the action. On the third day after the breakout, the stock gapped up and moved above 56.
-==== Support and Resistance Zones ====
+==== What Are Support and Resistance Zones? ====
-Because technical analysis is not an exact science, it is useful to create support and resistance zones. This is contrary to the strategy mapped out for Lucent Technologies (LU), but it is sometimes the case. Each security has its own characteristics, and analysis should reflect the intricacies of the security. Sometimes, exact support and resistance levels are best, and, sometimes, zones work better. Generally, the tighter the range, the more exact the level. If the trading range spans less than 2 months and the price range is relatively tight, then more exact support and resistance levels are best suited. If a trading range spans many months and the price range is relatively large, then it is best to use support and resistance zones. These are only meant as general guidelines, and each trading range should be judged on its own merits.
+Because technical analysis is not an exact science, it is useful to create support and resistance zones. This contradicts the strategy mapped out for Lucent Technologies (LU), but it is sometimes the case. Each security has its characteristics, and analysis should reflect the intricacies of the security. Sometimes, exact support and resistance levels are best, and sometimes, zones work better. Generally, the tighter the range, the more exact the level. If the trading range spans less than two months and the price range is relatively tight, then more exact support and resistance levels are best suited. If a trading range spans many months and the price range is relatively large, it is best to use support and resistance zones. These are only general guidelines, and each trading range should be judged on its own merits.
 {{:chart_analysis:support_and_resistance:suppresis-8hal.png?nolink&}}
-Returning to the analysis of Halliburton (HAL), we can see that the November high of the trading range (32 to 44) extended more than 20% past the October low, making the range quite large relative to the price. Because the September support break forms our first resistance level, we are ready to set up a resistance zone after the November high is formed, probably around early December. At this point though, we are still unsure if a large trading range will develop. The subsequent low in December, which was just higher than the October low, offers evidence that a trading range is forming, and we are ready to set the support zone. As long as the stock trades within the boundaries set by the support and resistance zone, we will consider the trading range to be valid. Support may be looked upon as an opportunity to buy, and resistance as an opportunity to sell.
+Returning to the analysis of Halliburton (HAL), we can see that the November high of the trading range (32 to 44) extended more than 20% past the October low, making the range quite large relative to the price. Because the September support break forms our first resistance level, we are ready to set up a resistance zone after the November high is formed, probably around early December. However, we are still unsure if a large trading range will develop. The subsequent low in December, which was just higher than the October low, offers evidence that a trading range is forming, and we are ready to set the support zone. As long as the stock trades within the boundaries set by the support and resistance zone, we will consider the trading range to be valid. Support may be looked upon as an opportunity to buy, and resistance as an opportunity to sell.
+===== The Bottom Line =====
+Identification of key support and resistance levels is an essential ingredient to successful technical analysis. Even though it's sometimes difficult to establish exact support and resistance levels, knowing their existence and location can greatly enhance analysis and forecasting abilities. If a security is approaching an important support level, it can serve as an alert to be extra vigilant in looking for signs of increased buying pressure and a potential reversal. If a security approaches a resistance level, it can act as an alert to signs of increased selling pressure and potential reversal. **If a support or resistance level is broken, the relationship between supply and demand has changed.** A resistance breakout signals that the bulls (demand) have gained the upper hand, and a support break signals that the bears (supply) have won the battle.
+===== Support and Resistance Level FAQs =====
+==== Why is the identification of support and resistance levels important in technical analysis? ====
+Identifying key support and resistance levels helps in forecasting and analysis. The levels act as alerts for potential reversals and signify changes in the relationship between supply and demand.
+==== How is the concept of supply and demand related to support and resistance? ====
+In the financial markets, prices are driven by excesses of supply (which pushes prices down) and demand (which pushes prices up). When supply and demand are equal, prices move sideways. Support is the level where demand is strong enough to prevent the price from declining further, while resistance is where selling is strong enough to stop the price from rising further.
+==== What does it mean when support turns into resistance and vice versa? ====
+When a price breaks below a support level, the broken support can become a resistance level. Likewise, when the price rises above a resistance level, it can become a new support. This shift indicates changes in supply and demand dynamics.
+==== What do support and resistance level breaks signify? ====
+A break below support indicates sellers are willing to sell at even lower prices. It also indicates a lack of buyers. Conversely, a break above resistance shows a new willingness to buy at higher prices, and there's a lack of sellers.
+==== How are support and resistance levels related to trading ranges? ====
+A trading range is when prices move within a narrow range, signaling balanced supply and demand. A break above or below this range indicates that either the bulls (for an upward break) or bears (for a downward break) have taken control.
-===== Conclusion =====
-Identification of key support and resistance levels is an essential ingredient to successful technical analysis. Even though it is sometimes difficult to establish exact support and resistance levels, being aware of their existence and location can greatly enhance analysis and forecasting abilities. If a security is approaching an important support level, it can serve as an alert to be extra vigilant in looking for signs of increased buying pressure and a potential reversal. If a security is approaching a resistance level, it can act as an alert to look for signs of increased selling pressure and potential reversal. **If a support or resistance level is broken, it signals that the relationship between supply and demand has changed.** A resistance breakout signals that the bulls (demand) have gained the upper hand and a support break signals that the bears (supply) have won the battle.