SUPPORT AND RESISTANCE

Resistance level is the top end of the price pattern, while the support level is the lower end of the pattern. Once the price of the stock breaks through the identified areas of support or resistance, volatility quickly increases, and so does the opportunity for short-term traders to generate a profit.

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 move reveals who is winning the battle.

During the period shown, note how each time prices fell to the $45.50 level, the bulls (i.e., the buyers) took control and prevented prices from falling further. That means that at the price of $45.50, buyers felt that investing in Phillip Morris was worthwhile (and sellers were not willing to sell for less than $45.50). This type of price action is referred to as support, because buyers are supporting the price of $45.50.

Similar to support, a “resistance” level is the point at which sellers take control of prices and prevent them from rising higher. In essence, the price at which a trade takes place is the price at which a bull and bear agree to do business. It represents the consensus of their expectations. The bulls think prices will move higher and the bears think prices will move lower.

Therefore, support levels indicate the price where the majority of investors believe that prices will move higher, and resistance levels indicate the price at which a majority of investors feel prices will move lower.