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Support and Resistance Lines

Author: Sam Green/Wednesday, December 20, 2017/Categories: Mikes Blog

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One of the key tenets of technical analysis is Support and Resistance levels. These levels are considered as points on a chart that share prices have difficulty breaking through. Like trend lines, there can be multiple levels of support or resistance to consider.

Support lines are created at a price point in which a stock price falls to, before reversing. Support levels are therefore projected below the current share price, with the expectation that prices will fall to a support level, before sufficient buying comes in at the support level to reverse the share price direction, leading prices to rise.

Resistance lines are created at a price point in which a stock price rises to, before reversing. Resistance levels are therefore projected above the current share price, with the expectation that prices will rise to a resistance level, before sufficient selling comes in at the resistance level to reverse the share price direction, leading prices to fall.

Many traders will try to buy where they see support levels, and sell where they see resistance levels, which helps turn share price direction at these levels. In a sense, these lines often become a self-fulfilling prophecy, as their presumed existence generates enough contrarian trading activity to reverse prices and “confirm” the support or resistance level.

It’s important to note that Support and Resistance levels may swap roles once broken. A resistance level in the past may become a support level in the future, and vice versa.

For example, the chart below of Bank of Queensland (BOQ) shows both a key resistance level, and a key support level. You can also see that a resistance level in the past, has become a support level recently (indicated by the middle line)

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