Support and Resistance Levels

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Almost every investor will be familiar with the terms support and resistance levels. It is important to know how these levels come about and what is their exact implication and impact. We all know that a curve has its ups and downs like a roller coaster.  

A resistance level is said to be obtained whenever the index price goes down from a peak. The peak becomes the resistance level. Whenever the price approaches the resistance level, there is a selling pressure. This is because of the effect that the peak level has – the investors who failed to sell at a high level would be keen to sell or liquidate their shares.

A support level is said to be reached whenever the price or index rebounds after reaching a trough. At the support level there is a buying pressure. This occurs because those investors who failed to buy at the lowest price would like to purchase the shares before the price increases further.

A breach of these levels would indicate a distinct departure from the ongoing trends. This situation would indicate an attempt to set newer levels. An investor will therefore need to keep track of the support and resistance levels of the share and in addition the investor will need to watch out for factors that cause a shift in these levels due to the changing market sentiment.
 

The illustration illustrates the prices of Share ‘X’ during December 20xx. From the reading on the chart it can be seen that the support level hovers at around $90 $95. The resistance level hovers at around $130 - $135. An investor can do well once the concepts and interpretation of the levels of support and resistance have been made. This study allows an investor to infer the movement of the price of the share before its actual occurrence.