Technical Analysis (Charting), Support & Resistance Levels

Technical Analysis (Charting)

Chapter: 13 Technical Analysis (Charting)

Section: 3 Support & Resistance Levels

The Dow Theory incorporates notions of support and resistance levels in stock prices. A support level is a value below which the market is relatively unlikely to fall. A resistance level is a level above which it is difficult to rise. Support and resistance levels are determined by the recent history of prices. Technicians see resistance and support levels as resulting from common psychological investor traits. Consider, for example, stock XYZ, which traded for several months at a price of SR 72 and then declined to SR 65. If the stock eventually begins to increase in price, SR 72 will be a natural resistance level because the many investors who originally bought at SR 72 will be eager to sell their shares as soon as they can break even on their investment. Therefore, whenever prices near SR 72, a wave of selling pressure will develop. Such activity imparts to the market a type of “memory” that allows past price history to influence current stock prospects.

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