Supports and resistences

Supports and resistances

Support and resistance levels are important areas / zones over which the forces of supply and demand meet.

The change in the prices of the financial instrument studied, mainly linked to the volatility of the same prices, is the result of the change in balance between supply and demand. When the supply exceeds the demand, the price tends to go down and vice versa, when the demand exceeds the offer, the price tends to rise.

The current demand and supply therefore identify these levels of support and resistance calculated in a statistical-probabilistic way; these levels represent for technical analysts crucial elements to determine the psychology of the market.

When the support or resistance levels are broken, it is assumed that the supply and demand forces that created the levels themselves previously have changed. In this case, new levels of support and resistance will probably be established given a new balance between supply and demand.

SUPPORT

Support is the level at which demand is strong enough to prevent the stock from falling further. In the image above you can see that whenever the price reaches the support level, it has difficulty penetrating that level. The logic is that as the price falls and approaches support, buyers (demand) become more inclined to buy and sellers (supply) become less willing to sell.

RESISTENCE

Resistance is the level at which the supply is strong enough to prevent the stock from rising. In the image above you can see that whenever the price reaches the resistance level, it has a hard time going up. The logic is that as price rises and approaches resistance, sellers (supply) become more inclined to sell and buyers (demand) become less willing to buy.

Static levels of support and resistance

Static supports and resistances

Static supports, as well as static resistances, are horizontal lines that are drawn on the chart and positioned on relative and / or absolute minimum (for supports) and maximum (for resistances) levels.

The following configurations are supports or static resistances:

• Absolute or relative minimums (for supports)
• Absolute or relative maximums (for resistances)
• Fibonacci Retracement or extension
• Upper limits of a lateral channel (resistances)
• Lower Limits of a lateral Channel (Supports)

Dynamic supports and resistances

Dynamic supports are lines or curves positioned below the price line, while dynamic resistances are lines or curves positioned above the price line. They have the same characteristics of the supports and static resistances with the only difference that, being dynamic, they have a variation of the values over the time period.

The following configurations are dynamic supports or resistors:

• Trendline
• Limits of graphic Pattern figures (ascending or descending channels, triangles, wedges, etc.)
• Moving averages
• Limits of the Bollinger Bands
• The tracing of the Trend Follower indicators

Reversal of support and resistance roles

A key concept in technical analysis is that when a resistance or support level is broken, its role is reversed. If the price falls below a support level, that level will become resistance. If the price rises above a resistance level, it will often turn into support. When the price breaks through a support or resistance level, supply and demand are thought to have moved, causing the breached level to reverse its role.

Support and Resistance – Reversal of roles in the chart

The same concept applies not only to static supports and resistances, but also to dynamic support and resistance cases.

Supporto e Resistenza dinamica – Inversione dei ruoli su grafico