In stock market technical analysis, support and resistance are certain predetermined levels of the price of a security at which it is thought that the price will tend to stop and reverse. These levels are denoted by multiple touches of price without a breakthrough of the level.
Lets say the stock came down and from the 1st point it went up for the first time. After that it again came down and touches the same level and bounces back, this level acts as a support level because at this level the buyers are not allowing the market to go down they are pushing the stock price up. This means at this support level there are buyers who are more interested to buy the stocks. Therefore, from this level the stock went up and again at same level it bounces back for the 2nd time. This upper level formed in the process where the stock touched for the 2nd time will be called resistance level. This is how the stock continues to move until or unless there is break down or breakout.
In the above case the buyers won and the stock went up. This stock then moved to certain level high and move down. At this point we mark our 2nd resistance level. As you can see this stock now has taken support at the previous resistance level. Therefore, we will now call our previous resistance in continuation as new support level from the point the stock has broken it. You will see market now has taken support from this level and moving back to the next resistance level.
Market then has again broken the new support level and went down. Hence, this new resistance level has again formed from the point sellers again took control of the stocks in the market.
What we need to understand is, there are two players in the market. buyers and sellers. When buyers take control of the market – they form support level. On the other hand when sellers take control of the market – they form resistance levels.
Any support or resistance line which does not change over time can be considered as static support or resistance levels. These are fixed levels and don’t change over time. For example:
- Fibonacci retracement
- Round numbers
- Psychological levels
But the price levels don’t work in the static levels it keeps changing in the real time.
In this image we have applied fibonacci retracement, as it is example of static support and resistance. Since the market is going down fibonacci has to be used from the top. So from the top to the bottom if we take the fibonacci level we can see that 0.78 level has become a strong resistance level. You can see how many time the market has tried to breach this level but was not successful. So finally the support level which was 0.618 level was broken and then the market smoothly went down. After the fall market took a strong support at 0.23 level. The market tried 4 times to breach this level but it was unsuccessful.
Once the buyers gained power here they tried to push the market up. It broke the 0.38 level which was the resistance level. Once this resistance level broke market smoothly went up and took support at 0.618 level. This level is strong because if this level is breached then there is a higher chances of reversal but just within 10 min the sellers came in control and push the market down and here 0.38 level became a strong resistance level later once that was broken and stocks took support at 0.23 level. now 0.23 is acting as support level and 0.38 as resistance level. Once the buyers were unable to take the stocks up from this level, market further went down. You will see how beautifully market is respecting the fibonacci retracement levels and all its levels are acting as strong support level and resistance levels.