CH 2

HOW TO IDENTIFY
SUPPORT &
RESISTANCE ZONES

SUPPORT RESISTANCE
SUPPORT
- support as “buying (actual or potential)
sufficient in volume to halt a downtrend in
prices for an appreciable period
- A support zone represents a concentration
of demand
MAJOR TECHNICAL PRINCIPAL
RESISTANCE 1. A previous high or low is a potential
resistance/support level
- resistance as “selling(actual or potential)
sufficient in volume to satisfy all bids and
hence stop prices from going higher for a time.
- resistance represents a concentration of
supply.
Figure 5.2 shows a more extended example.
This time, the price found temporary support
at B. C also proves to be a support point, but
note that the rallies are reversed at support
level B. Thus, the second principle is:
2. Support reverses its role to resistance on
the way up & down
Previous Highs and lows
- When prices decline, the normal human
response is not to take a loss, but to hold on.
That way, the pain of actually realizing a loss
can be avoided.
- As a result, when the price returns to the old
high, those who bought at that level have
great motivation to sell in order to break even.
Figure 5.3, we see the price rally through
resistance at B and A (the former support
level). The ensuing decline then finds support
at A again. Thus, our third principle is:1
RULES FOR DETERMINING The Greater the Speed and
POTENTIAL Extent of the Previous Move,
SUPPORT/RESISTANCE POINTS the More Significant a Support
or Resistance Zone Is Likely to
At round numbers Emotional points on a chart represent
Be
potential support/resistance levels
Support and resistance zones have a habit of
forming at round numbers.
This is probably because numbers such as 10,
50, or 100 represent easy psychological points
upon which traders and investors often base
their decisions.

In Chart 5.3, probably because of unexpected

bad news, the sugar price experiences three
downside gaps.

Chart 5.1 shows the sugar price for a period

spanning 2002–2003.

Note how previous highs and lows offer good

support/resistance points for future trading.
Unfortunately, there is no way of knowing
whether a particular level will turn out to be
support or resistance, or even whether it will
be a pivotal point at all.

That’s why these are merely intelligent places

for anticipating a temporary reversal. Resort
to other indicators such as oscillators is
therefore required.