Primer For Finding Support And Resistance Levels For Stocks

Finding and updating support and resistance levels is among the primary jobs that technical analysts do. A support level (SL) is the price at which securities that are dropping in value are expected to bounce back. A resistance level (RL) is the reverse, and is the expected cost where securities climbing up hit a ceiling and are unable to climb further.
Where these support and resistance levels come from and how to find them for a specific stock can be a complex matter, made much more challenging because these values can and do change intermittently. Just before getting to the technical descriptions, let's try something simpler first - such as the psychological aspects behind this phenomenon. As an example, consider that a share is purchased for $100 by an investor.
Let's say the share climbs up to $120 but just before the investor can offload the share, it drops back down to $110. Now it starts going up once more, and when it reaches $120 the investor has to think about whether it really is going to drop back down and if so, wouldn't it be much better to offload it just before it drops? Because a entire lot of individuals face the exact same issue and really do offload it at $120, the price drops again.
The stock thus gets marked with a $120 RL and finds it tough to break past it even if the company behind the stock is worth a whole lot much more. The concept is the exact same when the stock is trending downwards. In the above case, since the stock rose once more after dropping to $110, this price gets marked as an SL where investors seeking value believe it is going to rise and commence purchasing, which ensures that the stock bounces back at this price.
Of course, this is really a simplistic view. In reality there are many much more elements to consider. For example, numerous investors tend to fixate on round numbers. So a stock which is priced around $48 and rising will find it hard to break past the $50 barrier because numerous investors will exit when it hits $50 (instead of $49 or $50.2, $50.8, etc.), thus creating an RL.
There are also proactive strategies to decide what the future SL & RL is going to be. If the long-term forecast for a stock is favorable, it tends to crack past the RL eventually and climb up to the next one. This next RL or SL can be predicted using strategies like trendlines and calculated pivots.
One much more factor that might assist here is that the next SL can be at the previous RL. For example, if a rising stock cracks past $50 then its new SL will be $50. If it's trending downwards and falls below $50, then its new RL becomes $50. There are many a lot more such interesting concepts that impact support and resistance levels, and acquiring to know all of them is one of the much more enjoyable aspects of an analysts job.

By: Mark Dearth

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