Support and Resistance Points

Support and Resistance Points

A support point is a place where buying overcomes selling and, consequently, the market tends to rise. The support points develop quite often, and indicate places where traders believe the market is oversold, or a good buy.

A resistance point is a place where selling overcomes buying, and therefore, the market drops. There are points constantly recur on a short-, intermediate-, and long-term level, and become the basis for making trading decisions. The pot are reference frames providing possible areas to enter the market and equally important areas for exiting the market. This will investigated further when we look at trend lines.

Many people find support and resistance frustrating to work with because the levels are ranges, as opposed to exact numb. or levels. Some believe these levels do not really signify anything especially when markets violate these levels. For example, the previously mentioned 90 support level in June is broken on August 6 and decisively penetrated on August 21. However, these levels cannot be predicted with 100% accuracy, like an experiment in physic The trader must realize we are really studying the actions of people, m not merely precise economic data. Therefore, we are working in probabilities not certainties.

Once a support point is broken, the level becomes a resistance point. The converse is true where a resistance point which is broken, becomes a support point. The transformations of support to resistance, and of resistance to support.

Once broken, the support level becomes a resistance level and the resistance level becomes a support level.

Why does this happen? Support and resistance points indicate levels where significant buying and selling occur. If a support point is broken, the traders who were long will now tend to become sellers at the same place in order to break even on the trade. Whenever " trader begins to lose money, one of the first impulses is to get out at the original point of entry, in order to break even. This is one of the most important reasons why support points become resistance points, and vice versa. The selling at the old support point will now provide resistance in the market. The same reasoning applies for resistance levels.

Another reason for this transfiguration is that support and resistance points may represent important fundamental price levels. Buyers and sellers converge at these points, so the levels become areas of inertia, where price moves may be slowed in either direction.

The September 89 NYSE contract is an example of resistance becoming support. The resistance level of 173, established In February and March, is taken out decisively in April, and becomes support when the market retraces in May. The high between 177 and 178 in April is broken through in May, and becomes support In late June and early July.