Stock Trading Strategies > Technical Analysis > Chart Patterns

Support and Resistance

Support and resistance are one of the cornerstones of technical analysis. Support and resistance are simply the areas where buyers and sellers have shown a willingness to either buy (in the case of support) or sell (in the case of resistance).

That may seem a bit simplistic but very often price is ultimately governed by basic human emotions. We have all been in the position where we buy a stock and immediately it begins to decline. Our basic instinct is to not sell this stock until we can do so without suffering a loss. If enough investors buy at the same price point and immediately suffer "buyers' remorse" the result is a resistance point. Resistance points often occur after a stock has had a lengthy advance into a key news event. As investors "sell on the news" some unlucky investors are trapped the absence of new buyers leads to weakness, the stock begins to fall. Every time the stock rallies to this level those that bought poorly will sell.

Support is a more difficult concept. Support is usually the result of buyers being rewarded for purchasing a stock at a specific price. If you buy a stock at a certain price level and it immediately rallies the odds are you'll feel very good about yourself and your purchase price. After selling that stock for a profit, you are likely to consider buying the stock on any retreat to this level (if it worked once it is could work again). If enough investors are willing to buy at a certain level it becomes support.

Understanding the nuances of support and resistance is the most important part of technical analysis. Now let's look at support and resistance in some common technical patterns, the flat base, the downtrend and the always popular uptrend.

price and time are linear support and resistance in a flat base