Support and Resistance
Support and Resistance is one of the most important and fundamental part of technical analysis:
- Support: Prices should rise after touching support.
- Resistance: Prices should fall after hitting resistance.
An example of price respecting support and resistance lines is given next in the chart of the Semiconductor HOLDRS (SMH):
When support and resistance has been firmly established: Buy Signal - Price touches support
Buy Signal
Buy when price touches the support line
Sell Signal
Sell when price touches the resistance line.
Breaking Support & Resistance
Another fundamental concept of support and resistance is listed next and is shown in the chart below of Alcoa (AA) stock:
- If price breaks below support, then that support level becomes the new resistance level.
- If price breaks above support, then that resistance level becomes the new support level.
Support and Resistance are basic yet vitally important technical analysis tools. On every time frame, intra-day, daily, weekly, and monthly, Support and Resistance levels are respected by traders. Knowledge of these levels helps keep a trader on the correct side of the market, thus helping the trader profit.