8/19/2019 Understanding Support and Resistance

http://slidepdf.com/reader/full/understanding-support-and-resistance 1/4

Understanding Support and Resistance

By Martin Pring

Two terms you hear a lot about are support and resistance. Basically, they are points on a chart where

the probabilities favor at least a temporary halt in the prevailing trend. For example, if prices are

declining and reach support, as in Figure 1 they can be expected to bounce. The rally may be

temporary, as at point A, or may even mark the low point for the whole move, as at point B.

n their classic book Technical Analysis of Stock Trends, !dwards and "agee define support as

buying, actual or potential, sufficient in volume to halt a downtrend in prices for an appreciable period.

#hile we are on the sub$ect of definitions, resistance is selling, actual or potential, sufficient in volume

to satisfy all bids and hence stop prices going higher for a time.

Think of resistance as a temporary ceiling and support as a temporary floor, as illustrated in Figure %.

n order to become a floor, a support area must represent a concentration of demand. emphasi&e the

word concentration because supply and demand, by definition, are always in balance. At whatever

price a stock trades, there will always be the same amount bought as is sold. t is the relative

concentration or enthusiasm of either buyers or sellers that determines the price level. A support area,

then, is one in which sellers become less enthusiastic or less willing to part with their assets and

buyers, at least temporarily, are more strongly motivated.

8/19/2019 Understanding Support and Resistance

http://slidepdf.com/reader/full/understanding-support-and-resistance 2/4

'ften support and resistance area occur at round numbers. For the (ow in the 1)*+s, it was 1+++.

!very time the (ow came up against that psychologically important number, sellers became more

enthusiastic and prices declined. For gold in the mid1)-+s and 1))+s, the magic number has been

/++.

General Rules

am sure you are now asking the 0uestion, 2o do know how important each support and resistance

level is likely to be34 5nfortunately, cannot answer that 0uestion precisely, but can offer some

general rules to help.

The more of a security that changes hands at a particular level, the more significant that level is likely

to be as a support or resistance &one 6Figure 78. That is fairly selfevident, for whenever you have a

large number of people buying and selling at a specific price, they tend to remember their own

experiences. Buyers like to break even after suffering a loss. 9ellers, on the other hand, may have

bought lower down and now recall that prices previously stalled at the resistance area. Therefore,their motivation for taking profits is that much greater.

%. The greater the speed of the preceding price movement, the more significant a support or

resistance &one is likely to be 6Figure /8. :ust think of trying to lift a heavy weight. f you make the

attempt after running a fast race, you are less likely to succeed than someone who has not made

such a dash. "arkets are the same way. A modest support or resistance barrier is likely to be much

more significant if prices have been racing ahead or declining sharply than if prices are reached after

a slow, steady advance or decline.

8/19/2019 Understanding Support and Resistance

http://slidepdf.com/reader/full/understanding-support-and-resistance 3/4

7. The more powerful the move preceding the support or resistance &one, the greater its potential as a

barrier 6Figure ;8. This may seem to contradict the previous rule, but it does not. t is important to

make a distinction between a speedy and lengthy move and a powerful one. <emember our analogy

to lifting a weight after running a fast race. #ell, if the lifter is normal, the rule still stands. 2owever, if

an 'lympic athlete has $ut run the race, lifting the weight will be a piece of cake. t works the same

way in the marketplace. An area of resistance, for example, will 0uickly fall if the previous move is

associated with a huge expansion of volume and momentum. f there is a lot of power behind a move,

the support or resistance &one is much more likely to fall on the first attempt.

/. The more times a support or resistance &one has been able to halt or reverse a price trend in the

past, the greater its significance is likely to be 6Figure =8. <ecall the example of a building. The moretimes a floor is pounced on, but does not give way, the greater the implication when the floor finally

does give way. This is probably the single most important rule we have for estimating the potential

importance of a support or resistance area. :ust think, again, of the (ow :ones ndustrial Average>

From 1)== to 1)-%, 1+++ was the barrier to beat. t had been touched on several occasions, but

never decisively breached. 'nce 1+++ was bettered, the move to %, 7, /, and ;+++ came relatively

easily.

8/19/2019 Understanding Support and Resistance

http://slidepdf.com/reader/full/understanding-support-and-resistance 4/4

;. The longer the period that has elapsed between the time a support or resistance &one was last

challenged, the less significance it is likely to have. This means that a supply, which is six months old,

is likely to have greater potency than one established 1+ or %+ years ago. !ven so, it is almost

uncanny how support and resistance levels can repeat their effectiveness time and time again, even

when separated by many years.

!xcerpted from ntroduction to Technical Analysis4