The Highs and Lows of Support and Resistance

Meir Barak |

High and Low Points

High and low points can serve as areas of support and resistance, both on intraday charts and daily charts.

High – Turning into Resistance

High_Turning_into_Resistance_8_11.jpg

top-to-resist

Why does a high [1] create resistance when the price returns to the same [2] point? 

To understand this, we need to penetrate the thoughts of buyers more deeply.

Every point on the chart represents both buyers and sellers. The same is true for when the stock reaches its high [1]. Of course, buyers at that point still do not know they have reached the peak price, and in a show of enthusiasm over a strong stock, they buy at this high, hoping the stock will go up. In actuality, when they discover that it is dropping, they are disappointed. They are losing money, and sorry that they were tempted and bought at a high price. They do not want to sell at a loss, so they promise themselves that if the stock returns to the price at which they bought [1], they will correct their mistake and get rid of the stocks at the same price they bought them. 

They are not the only disappointed buyers who bought; there are many others who are also waiting to sell at their entry price. If the stock does go back to that first high [2], it will encounter all those waiting sellers. 

Can the stock price overcome the sellers’ resistance and rise to a new high? Sometimes yes, sometimes, no. The question revolves around the balance of forces between sellers and buyers. In the chart above, we can see that the stock continued rising [3]. In other words, the buyers won in this case.

The retreat from the second high [2] is called “double top.” When a stock rises to the double top, in most cases it will retreat due to resistance, and drop. In such situations, if you bought a stock that is about to reach its double top, it would be wise to realize some of the profits a little before the anticipated resistance point.

Low – Turning into Support

bottom-to-support

Low_Turning_into_Resistance_8_11.jpg

Why Does the Last Low Create Support?

Here, too, we need to understand the psychological perspective of buyers and sellers. At every point on the chart, we will find both buyers and sellers, but in this case, we call the sellers “short sellers.”

At the stock’s low [1], short sellers cannot yet identify this point as the low. In a burst of enthusiasm over a weak stock price, they execute a short, hoping that it will continue dropping. In actuality, they discover that the stock is rising against their hopes and they are losing…which disappoints them. They promise themselves that if the stock returns to its pre-short price (that is, the same price as the previous low), they will correct their mistake and close the short (in other words, they will buy). 

If the stock does drop to the same low [2], it will encounter all those disappointed short sellers who are thrilled that the stock returned to their entry position. Can the stock overcome the support of buyers and drop to a new low? Maybe yes, maybe no… The answer depends on the balance of forces between sellers and buyers. 

In the chart above, we see that the stock continued dropping [3]. In this case, sellers won. The rise at point [2] from the low is called a “double bottom.” When the stock drops to a double bottom, in most cases it rises again because of the support created by buyers.

To learn more about the stock market and to begin your own journey toward financial independence, visit Meir Barak's site Tradenet and check out his book "The Market Whisperer." 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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