Support & 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

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.