The differences between support vs. resistance are very important for investors. This is especially true for investors who are just getting acquainted to the investing world. Support and resistance are two of the most fundamental concepts of investing. That’s why every investor should take a moment to learn more about these terms. Both terms are very closely related and concern how markets operate.
The Intricacies of Stock Prices
Markets are complex beasts, so to speak, and the movements of stock prices are very intricate. Generally speaking, stock prices are set by the perceptions investors have of a certain company or stock. This means psychology and other “fuzzy” topics can be very important for stock prices.
It is tempting to believe that stock prices are determined solely by business developments, financial numbers, and the like. In many ways this is true, but it’s not the complete truth. Psychological factors can also have an impact on stock prices.
Support and resistance both refer to certain trading barriers that stocks have difficulty breaking (in terms of price). Support refers to a sort of “glass floor”, meaning prices for a given stock rarely fall below a certain point unless a major development occurs. If Acme Computers has been trading for $25 dollars, for example, a support level might form at $20 dollars. This means that if stocks drop to that point investors will flock to pick it up based solely on the perceived good value of the stock. If stocks fall below the $20 dollar mark investors will believe the stock is cheap and will look to buy it up. Increasing demand thus leads to increasing prices.
Acme Computers might also develop a resistance level, or stock resistance. This means that stocks will rarely venture beyond said price, and when prices do advance they often quickly retreat. Let’s say Acme Computers develops such a resistance level at $30 dollars. Acme Computers might occasionally trade higher than $30 dollars. However, once it does so many investors will rush to sell and cash out while stock prices are high. Stock prices thus decline.
If you follow a few stocks closely, you’ll almost certainly notice that resistance and support levels are forming. Once stocks venture beyond those levels, markets will react quickly and prices will swing in the appropriate direction. Of course, big announcements and developments can cause permanent shifts in either resistance or support levels, but we’ll get to that later.
Head Winds and Therapeutic Mattress
If you have trouble remembering the difference between support and resistance levels, you can think of resistance levels as “head winds”. Once a stock reaches a certain price point it will face head winds that resist any further movement and push prices down. You can think of support levels as a sort of therapeutic mattress, constantly supporting the stock and providing a cushion even when prices are falling.
You should know, however, that stock barriers can and will be broken. For awhile it looked like Apple Computers was running into a $100 dollar barrier and that the company would have trouble breaking the barrier. The Apple Watch, massive iPhone sales, and record profits all forced the “glass ceiling” upwards. Apple is now trading for more than $130 dollars. Once Apple broke the $110 mark, stock prices posted pretty rapid gains, which suggests that once a stock convincingly breaks a resistance level, stock prices could jump.
As of writing this article, however, AAPL appears to have hit a barrier at $130, with stock prices only tip-toeing past that mark. As the glass ceiling increases, the glass floor also generally goes up in value. When Apple has trended towards the $120 mark, prices have quickly rebounded.
Support resistance are very important concepts for investors and something everyone should pay attention to. You can learn a lot about stocks by following a support resistance indicator. You can also study support and resistance charts. These charts will help you understand and visualize both support and resistance levels, which will help you understand a lot about the stocks.