Support and Resistance

These two terms help to describe highs (peaks) and lows (troughs) that can be seen when charting a specific market. The price movement of that market in relationship to these peaks and troughs can help you determine whether that market will stay on course, reverse its course, or not move at all.

• Support - Refers to the troughs and indicates a prior low, or series of lows, identified on a chart. Support levels always lie under the market and indicate a period where buying interest is strong enough to overcome selling pressure that turns the price up. In other words, support illustrates a level that "supports" the price from falling below. Price movement below a defined support level may warn that a downtrend is occurring or continuing. Price movement bouncing up from the support level may indicate that a downtrend is ending, or that prices have gone as far down as they are going to, at least for a period of time.
• Resistance - Refers to the peaks that represent a prior high or series of highs identified on a chart. A resistance level lies over the market and indicates a period where selling pressure overcomes buying pressure that turns the price downward. In other words, resistance indicates a level above which the price "resists" rising. If a market's price breaks above a prior established resistance level, it may indicate that a price's move upward is continuing or beginning. If, however, the prices are not moving past the resistance level, that is, closing below the resistance, this could indicate a reversal in price direction, or an indication of a sideways market not moving up or down significantly.

Possibly as much as 33% of the time, a market's price will move sideways in a flat horizontal pattern referred to as a trading range. When this happens, it is usually because supply and demand are balanced and the market has now become "trendless."

To identify a trading range, you should be able to visualize a band drawn along the tops and bottoms of the price movement that completely encloses all daily price changes over, let's say, a six-week period, and the band does not exceed 5% of the median price during that period. The actual values used for the width of this band, the length of the period, and the percentage above and below the median price are all defined according to individual preferences. Identifying a trading range helps to determine a sideways market, as well as the strength of that sideways market. You are also able to identify fairly quickly when a price begins moving either up or down. This action is referred to as a breakout.

A breakout is a closing price that exceeds the defined trading range, either above or below. When a breakout occurs, it usually indicates that the price is beginning to move either up or down. If the breakout is seen below the trading range, it indicates a downward swing, and conversely a breakout occurring above indicates an upward price swing. Again, the specific values used to determine a valid breakout vary depending on the individual.

An established trading range is also indicative of a sideways market, and the upper and lower level of the trading range can become resistance and support levels. A breakout above the trading range may indicate the beginning of a possible bull market and conversely a breakout below may indicate the beginning of a bearish market.

A gap is another term that describes spaces between bars on a chart and can be indicative of a significant move or change in market direction.