Support and resistance: the market's memory
Support is where falling price meets buyers; resistance is where rising price meets sellers. These zones are the memory of where price stopped in the past.
In the chart above you see horizontal, dashed grey lines with labels on their left edge such as ‘SUPPORT’, ‘RESISTANCE’, ‘S1’, ‘PIVOT’ and ‘R1’. All of them are levels where price previously stopped, turned or hesitated.
Support is where price stopped on the way down: enough buyers showed up there to halt the decline. Resistance is the opposite: price met sellers on the way up and turned back. Why do these levels work again? Because markets are made of people, and people remember prices. Someone who bought a stock at 100 and sat on a loss sells when price returns to 100 to ‘get out even’; someone who missed 100 waits to buy there this time.
The two kinds of levels on the chart are found in different ways. ‘SUPPORT’ and ‘RESISTANCE’ come from the recent real turning points (swing lows and highs). ‘S1, PIVOT, R1’ are classic pivot levels calculated from the previous period's high, low and close; since many investors use the same calculation, reactions at these levels are common too.
Support and resistance are zones, not thin lines. Price can poke a little beyond a level and come back; that does not mean the level failed. The more often a level is tested, the better known it becomes; but a level that is tested many times also wears out: with every touch there are fewer buyers or sellers left there.
How to read it
- Think of a level as a zone: a little above and below the line belong to the same area. Expecting a reaction to the exact penny sets you up for false breakouts.
- Confirm a breakout with a close: if the wick crosses the level but the candle closes back, there is no breakout. The candle must close on the other side.
- Broken resistance often turns into support: if price breaks resistance upwards and then comes back to test the same zone, that area is now support.
- Place the stop not right at the level but on the far side of the zone and outside normal price movement.
In this state right now
Liquid symbols currently sitting just above their monthly pivot S1 support (no more than 1.5 percent above it).
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Trap
The most common mistake is buying every price that reaches support because it looks ‘cheap’. In a strong downtrend supports break one after another, and each broken support can bring a new wave of selling. The second mistake is panicking because a wick broke the level. Decide on the close, not the wick, and check how ‘fresh’ the level is: a level from long ago may not be on the minds of today's traders.
Tip
The plans on the analysis screen often build entry and stop levels on these supports and resistances. After this lesson, check which level on the chart the number in the plan corresponds to; a plan anchored to a level is more meaningful.
Glossary
- Support
- A zone where falling price meets buyers and stops.
- Resistance
- A zone where rising price meets sellers and turns back.
- Pivot
- A reference level calculated from the previous period's high, low and close; S1/S2 sit below, R1/R2 above.
- Role reversal
- Broken resistance turning into support, or broken support turning into resistance.
Mini quiz
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Study support and resistance levels in an analysis →For information only, not investment advice.