Support and Resistance
The Support level is the price level below which a stock has had difficulty falling over a period of time. It is considered as the level where many buyers tend to enter the stock. If the price of a stock falls towards a support level it is a test for the stock; the support level will either be reconfirmed or broken. It will be reconfirmed if a lot of buyers move into the stock, causing the price to bounce and rise away from the support level. It will be broken if buyers do not want to enter the stock and the stock falls below the support. The breaking of a support level is taken as a bearish signal, and can prompt more holders to sell the stock. This is generally known as a breakdown.
The Resistance level is conversely the price at which a stock or market can trade, but not exceed, for a certain period of time. The stock or market stops rising because sellers start to outnumber buyers. As with the Support level, the Resistance level tests the sentiment of the market for the stock. The price can either bounce off the Resistance level, or break above, giving a bullish signal to other potential buyers. This is generally known as a breakout. Once a resistance level is broken, it is regarded as the next level of support when the stock price experiences a pullback. Most traders use chart patterns and other technical analysis tools such as trendlines to identify stocks which are likely to break through a support or resistance level.
