Learn How Support Becomes Resistance

Support and resistance levels are important points in time where the forces of supply and demand meet. These support and resistance levels are seen by technical analysts as crucial when determining market psychology and supply and demand.

Support is the level at which demand is strong enough to stop the asset from falling any further.

Resistance is the level at which supply is strong enough to stop the asset from moving higher.

The psychology behind support and resistance.

First let’s assume there are buyers who’ve been buying a stock close to a support area. Let’s say that support level is $50. They buy some stock at $50 and now it moves up and away from that level to $55. The buyers want to buy more stock at $50, but not $55. They decide if the price moves back down to $50, they will buy more. They’re creating demand at the $50 level.

Let’s take another group of investors. They were thinking about buying the stock at $50 but never did before. Now the stock is at $55 and they regret not buying it. If it gets to $50 again, they will not make the same mistake and they will buy the stock. This creates potential demand.

The third group bought the stock below $50; let’s say they bought it at $40. When the stock got to $50, they sold their stock, only to watch it go to $55. Now they want to buy it back at the same price they sold it, $50. They’ve changed their sentiment from sellers to buyers. This creates more demand.

A key concept of technical analysis is that when a resistance or support level is broken, its role is reversed. If the price falls below a support level, that level will become resistance. If the price rises above a resistance level, it will often become support. As the price moves past a level of support or resistance, it is thought that supply and demand has shifted, causing the breached level to reverse its role.

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