Support and Resistance

Throw a bouncy ball at the floor and it bounces up. Throw it high and it hits the ceiling and drops back down. In the stock market, too, you often see prices mysteriously change direction when they touch a certain level.

Say a stock keeps falling and reaches a certain price range. Many investors think, "This price is cheap enough," and start buying. A flood of buy orders stops the decline and pushes the price back up. This invisible price floor is called support.

Now the opposite. A stock keeps climbing and nears a certain price range. Some people think, "I've made enough, time to sell." Others were stuck holding losses earlier, and they dump their shares as soon as they break even. When selling power overwhelms buying power, the rise stalls. This ceiling over the price's head is called resistance.

To be more precise, support and resistance are not steel plates that can never break. If a company gets big good news, or strong buying money enters the market, the price can punch cleanly through the ceiling. If bad news hits, the floor can give way without a fight.

In technical analysis, when a line breaks, its role is seen as flipping to the opposite. Suppose a price breaks through a solid resistance line (the ceiling) and climbs above it. The price level that used to be resistance is then seen as a new support level, the spot where the price may push off when it falls back. It's like punching through the ceiling and climbing to the second floor. The old ceiling is now the floor under your feet.

The reverse also holds. Suppose a firm support line (the floor) collapses and the price drops below it. Later, when the price tries to recover, that same spot is seen as turning into resistance that presses down on its head. The usual explanation is that people who bought at that level earlier want to sell and get out once they break even.

Many investors look for support and resistance on charts, and they mark them. They don't do it to predict future prices like a fortune teller. They do it to see with their own eyes which price levels market participants have generally reacted at.

For example, it is said that many people watch the area near a support line, and if the line breaks downward, they decide their judgment was wrong and back out. In that case, the line is often described as a stop-loss reference line. Likewise, observers often point out that more people take profits as the price approaches resistance.

But whether drawing these lines actually has any power to predict future prices is still debated in academia. It is not a proven formula. It is more accurate to see it as a psychological reference line that gains power for a while simply because many people are looking at it together.