Short note on SUPPORT AND RESISTANCE

Support and Resistance Introduction:

Support and resistance represent key junctures where the forces of supply and demand meet. In the financial markets, prices are driven by excessive supply (down) and demand (up). Supply is synonymous with bearish, bears and selling. Demand is synonymous with bullish, bulls and buying. As demand increases, prices advance and as supply increases, prices decline. When supply and demand are equal, prices move sideways as bulls and bears slug it out for control.

What is Support?

Support is the price level at which demand is thought to be strong enough to prevent the price from declining further. The logic dictates that as the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below support.

In the above chart, we can see the chart of Apollo Hospitals which have taken support atleast 3 times, from where bounce back was seen. So, normally people tend to buy when the stock moves up from its support levels, but in case if the stock goes below the support levels, people should not buy, as the stock will fall more, may be up to the next support level if any.

What is Resistance?

Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further. The logic dictates that as the price advances towards resistance, sellers become more inclined to sell and buyers become less inclined to buy. By the time the price reaches the resistance level, it is believed that supply will overcome demand and prevent the price from rising above resistance.

In the above chart, we can see the Max India Ltd have taken resistance three times at the peak levels (see resistance line), and then corrected back downwards. So, normally people tend to sell whenever the stock touches the resistance point and reverses back, and one should only sell if it comes down after testing the points, otherwise sometimes the resistance may be breached and stocks may move up. So always wait for the confirmation.

It is very important to note that once the support is broken, it becomes resistance, and it acts as resistance next time the stock moves up, and once the resistance is broken, it acts as a support next time, when stock comes down after moving up from that earlier resistance.