Support and Resistance

Most experienced traders will be able to tell many stories about how certain price levels tend to prevent traders from pushing the price of an underlying asset in a certain direction. For example, assume that Jim was holding a position in Amazon.com (AMZN) stock between March and November 2006 and that he was expecting the value of the shares to increase. Let’s imagine that Jim notices that the price fails to get above $39 several times over the past several months, even though it has gotten very close to moving above it. In this case, traders would call the price level near $39 a level of resistance. As you can see from the chart below, resistance levels are also regarded as a ceiling because these price levels prevent the market from moving prices upward.


On the other side of the coin, we have price levels that are known as support. This terminology refers to prices on a chart that tend to act as a floor by preventing the price of an asset from being pushed downward. As you can see from the chart below, the ability to identify a level of support can also coincide with a good buying opportunity because this is generally the area where market participants see good value and start to push prices higher again.



The first thing you want to do is change your chart from a line chart to a bar chart. Lines are nice, but they dont give us enough information about what a stock did intraday. A bar chart shows us the open, the daily move and the close (candlesticks also do this, but we will get to those later). Now that you have a bar chart, lets do the most basic of all analysis, lets look for support and resistance levels.



Finding support: Starting from the left in Jan 2005, (first blue arrow), you can see that INTC hit the $22 level, then rallied. In April the stock dropped and hit $22, the rallied again. It seems that $22 is a nice support level. Investors are basically thinking “Hmm, I like INTC and would buy it if it hit $22…” and so they do. If we connect those two support levels and extend the line to the right, it shows us a nice long term support level.

Finding resistance: After that first support was found, the stock rallied, but then stalled at $25.50 in March. You can see that in May, the stock blasted right through that resistance level. Note that support and resistance levels do not have to be horizontal, in fact they can be almost any angle. INTC hit $28 in June, and pulled back, that is another resistance point. By connecting the March and June peaks, then extending the resistance level outward, we find that the next resistance point in July was predicted correctly! Later in November we can see that the old $25.50 resistance stalled the rally, but as soon as it broke through, it moved quickly.

Think of support and resistance levels as jello like barrier, sometimes a stock will bounce off them, other times it will cut through.