Support, or support level, refers to a price below which a particular stock is not likely to fall according to historical data. Buyers tend to enter a stock near the support level since the stock is not likely to get cheaper. Support can be thought of as a floor below which the stock will not likely drop. Any time a stock falls toward the support level can be a test for the stock in which the support level is either confirmed or eradicated. If buyers buy into the stock as it approaches support level, than the price begins to rise and the support is confirmed. If buyers ignore the stock (or are significantly outnumbered by sellers) and its price plunges below support level, the support level has failed and been eradicated; a new support level will eventually emerge in the market.
Support and Resistance Trend Lines – Image Credit: Sensatus UK Limited (CC by SA-3.0)
The opposite of support is resistance, the highest price a stock will historically reach before beginning to fall. As a stock price nears resistance level, sellers typically get eager to sell, thinking the price will not get any higher. Sell-offs increase, the price begins to once again fall, and the resistance level is confirmed. As with support, if buyers instead continue to buy, or sellers ignore the approaching resistance level, than the price will soar above resistance, causing a new resistance level to form. Both support and resistance can be graphed in technical analysis using a trend line.
Recent Comments