We're going to outline the basics of support and resistance.  Knowing how to identify support and resistance is important before you move on to more advanced topics.  This begins your freshman year.

Bulls And Bears

Support and resistance represent key levels where the forces of supply and demand meet.  In the financial markets, prices are driven down by excessive supply and up be excessive demand.  Supply is associated with bearish, bears and selling.  Demand is associated with bullish, bulls and buying.  Get familiar with these terms!  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.  This is how support and resistance zones are formed!  Later, the Volume Reversal trade setup discuss how using volume as a guage for who is winning the battle.

Support Zones

Support is the price level at which demand is 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.  As the market declines into one of our zones, it becomes support, and we expect price to bounce higher.   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.   Identify support levels in this screenshot:

Support does not always hold and a break below support signals that the bears have won out over the bulls.  A decline below support indicates a new willingness to sell and/or a lack of incentive to buy.  Support breaks and new lows signal that sellers have reduced their expectations and are willing to sell at even lower prices.  In addition, buyers could not be coerced into buying until prices declined below support or below the previous low.  Once a support zone is broken, another support zone will have to be established at a lower level.

Where is Support Established?

Support levels are usually below the current price, but it is common to say that a security is trading at or near support.   Technical analysis is not an exact science; for this reason, it is very difficult to set exact support levels.  However, don’t you think we’ve been doing a pretty good job at it?  Have you seen the historical charts page?  Be aware that, price movements can be volatile and dip below support briefly.  This is called a washout move, and it often occurs on high volume, setting up a tradable bounce to the upside.  Most of the time, it is not even logical to consider a support zone broken if the price closes several points below the established support level.

Resistance Zones

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.  As the market rises into one of our zones, it becomes resistance, and we expect price to pull back.  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.  Identify resistance levels in this screenshot:

Resistance does not always hold and a break above resistance signals that the bulls have won out over the bears.  A break above resistance shows a new willingness to buy and/or a lack of incentive to sell.  Resistance breaks and new highs indicate buyers have increased their expectations and are willing to buy at even higher prices.  In addition, sellers could not be coerced into selling until prices rose above resistance or above the previous high. Once a resistance zone is broken, another resistance zone will have to be established at a higher level.

Where is Resistance Established?

Resistance levels are usually above the current price, but it is common to say that a security is trading at or near resistance.  Technical analysis is not an exact science; for this reason, it is very difficult to set exact resistance levels.  However, don’t you think we’ve been doing a pretty good job at it?  Have you seen the Charts page?  Often, price movements can be volatile and rise above resistance briefly.  This is called a washout move, and when it often occurs on high volume, it can present a good countertrend shorting opportunity.  Most of the time, it is not even logical to consider a resistance level broken until the price closes several points above the established resistance level.

Integrating Zones With Your Own Trading Plan

Experienced traders, we believe that when you start using our zones as a confirming factor alongside of your own trading methods, you will improve your win percentage dramatically!

If the market is approaching an important support zone, it can serve as an alert to be extra careful in looking for signs of increased buying pressure and a potential reversal.  You might avoid getting short with the trend due to the potential for a reversal.  Likewise, if the market is approaching a resistance zone, it can act as an alert to look for signs of increased selling pressure and potential reversal.  You might avoid getting long with the trend due to the potential for the market to move lower.  If a support or resistance level is broken, it signals that the relationship between supply and demand has changed.  A resistance level breakout signals that bulls has gained the upper hand, and traders should be looking for a way to buy.  Likewise, a support level break signals that bears have won the battle, and traders should be looking for a way to sell.

Conclusion

Identifying support and resistance levels is an essential ingredient to successful technical analysis.  Sometimes, it is difficult and can be very time consuming to establish exact support and resistance zones.  This is where ToTheTick can help you.  When you take advantage of ToTheTick services, and you don't have to identify support and resistance levels.  We do the homework every night, and deliver solid support and resistance levels each morning.  Continue to the next classroom to learn more about our zones.