The Significance of Support and Resistance
What is support? Support is a level or area on the chart under the market where buying interest is sufficiently strong to overcome selling pressure. as a result, a decline is halted and prices turn back up again. Usually a support level is identified beforehand band a previous reaction low.
What is resistance? Resistance represents a price level or area over the market where selling pressure overcomes buying pressure and a prce advance is turned back. Usually a resistance level is identifed by a previous peak.
In an uptrend, the resistance levels represent pauses in that uptrend and are usually exceeded at some point. In a downtrend, support levels are not sufficient to stop the decline permamently, but are able to check it at least temporarily.
The amount of trading in a given support or resistance area can be determined in three ways: the amount of time spent there, volume, and how recently the trading took place.
The longer the period of time that prices trade in a support or resistance area, the more significant that area becomes. For example, if prices trade sideways for three weeks in a congetion area befor moving higher, that support area would be more important than if only three days of tading has occurred.
Volume is another way to measure the significance of support and resistance. If a support level is formed on heavy volume, this would mark that support level as more important than if very little trading had taken place.
A third way to determine the significance of a support or resistance area is how recently the trading took place. The more recent the activity, the more potent it becomes.