Part 3 of the Technical Analysis Classroom deals with the core concepts of support and resistance.
What is the support level and what is its significance? Support is a level at which a stock price tries to stabilise as it falls. Prices are more likely to bounce back from support levels. However, if the price falls below the support level, it is likely to continue to fall until it finds another support level.
Support is a price where demand is concentrated. So as prices drop and come near the support price i.e. the demand zone, traders start buying the stock, pushing the share prices higher.
Once a support area is identified, it provides a valuable entry or exit point depending on whether the stock holds or breaches that support level.
Do support levels keep changing? Yes, they do. Support is only a price level and it can be breached depending on market sentiment. When the price goes below the support level, the trader realises that the support level is not holding. Now, the trader will find a new demand zone for the stock, which becomes the next support level. Hence, the support level keeps on changing when previous support is broken.
What is a resistance level and what is its significance? Resistance is a price level that acts as a barrier to a rising stock price. If the stock price breaks out of this resistance level, it is likely to keep moving higher until it hits the next resistance.
A resistance zone is a level at which supply is concentrated, so as the price rises and comes near the supply zone, traders start selling the stock, pushing the stock price lower.
Once a resistance area is identified, it provides a valuable entry or exit point depending on whether or not that level holds.
Do resistance levels keep changing? A stock breaks out of a resistance level when the price rises above the resistance zone. Once a resistance level is broken, it means there is more demand for the stock than supply.
A resistance level once breached on the upside becomes a new support level. Similarly, a support level when breached on downside becomes the new resistance level.
There are multiple support and resistance levels for a stock, so once the initial levels are broken, the level shifts to the next support or resistance zone.
Different analysts have different support and resistance levels for the same stock, why is that? As seen previously, support and resistance levels are just zones of concentration for buyers or sellers. These zones are different for different stocks, depending on where the demand or supply lies.
A support or resistance level can be a trendline, a moving average, a 52- week high or low, any other indicator or price level where such demand and supply exists. Hence, different analysts have different support and resistance levels
Is volume a good indicator of a price trend because I have heard that market operators create artificial volumes to generate interest in a stock? Volume is the number of shares traded during a given time period. Itis used by analysts in addition to price action to gauge the strength of the price movement. Also, a trend in volume can be compared to a trend in price to determine whether a stock price is gaining or losing momentum.
To address the problem of artificial volumes generated by operators, a trader can look at the delivery volumes of stock. A deep look into delivery volumes will help the trader separate wheat from the chaff: find the stocks where the volumes are genuine. Higher the delivery volumes, more genuine are the volumes.
One will find delivery volumes to be very low on a consistent basis in a stock which is being operated.
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