Support and Resistence Levels

Resistance (technical analysis)

The resistance level is the highest price a security trades at over a period of time. The more often the price reaches a particular level of resistance and fails to break through, the stronger the resistance at that level. For this reason, many traders believe that the stronger the resistance, the less likely the price will break through that level.

Support and Resistence Levels (technical analysis)

The support level is the lowest price a security trades at, over a period of time. The longer the price stays at a particular level, the stronger the support at that level. Some traders believe that the stronger the support at a given level, the less likely it will break below that level in the future.

It is said that if a security breaks prior levels of support only by a small portion, it will drop sharply until a new level of support is reached.

How to Identify and Use Support and Resistance Levels

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Congestion

“Congestion” is my term for sideways price movement or range trading. And the Elliott wave pattern that best fits this description is a triangle. Those of you who have held a position during these periods know that it’s not fun. But the upside is that congestion often provides support or resistance for future price movements regardless of when it occurs. In May Coffee (Figure 6-1), notice how the brief period of congestion that occurred in early November 2003 acted as support for the December pullback. This happened again when the January selloff fell into listless trading for the rest of the month.

Price Support Levels

The weekly chart of Sugar (Figure 6-2) shows how these periods can also act as resistance.

Price resistence levels

And if you think about it, the tendency of congestion phases to act as support or resistance is right in line with the Elliott wave guideline on fourth wave retracements: support for a fourth wave pullback is the previous fourth wave extreme of one lesser degree.

Highs, Lows and Gaps

Other areas to watch for price reversals are previous highs and lows and also gaps. You can see on the chart of May Corn (Figure 6-3), for instance, that the September 2003 high was a significant hurdle for prices to overcome. For three months, each attempt to break through this level failed to produce a sizable decline. Also notice the small gap that occurred in early October. The December selloff closed this gap, and in doing so, introduced the subsequent rally. I have mentioned before how gaps often attract prices like magnets at first. Then they repel them — literally. Prices fill the gap and flee the scene, you could say.

Corn Price Support and Resistence

The April chart of Lean Hogs (Figure 6-4) gives us two examples of the same setup: The February advance failed at the previous high made in November 2003, and then fell back to close the late January gap. Prices failed at a previous high again in March and then closed the gap that occurred in February.

Support and resistence

The last chart for Orange Juice (Figure 6-5) offers one example of how previous lows can provide resistance. Each bounce within the last ten months in OJ has met resistance at or near a previous low.

Support and Resistance Price Levels
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