Support and Resistance

Support is a price level where buying has repeatedly stopped a decline; resistance is a level where selling has repeatedly stopped an advance. They are the most basic idea in chart reading: a price is the point where buyers and sellers agree to trade, and support and resistance show where that agreement has held before. When the balance shifts and price breaks through, it usually means expectations have changed.

Where the levels come from

There is no single formula. Traders mark levels at:

• Previous swing highs and lows, especially ones that price has touched several times.
• Round numbers such as $100 for a stock or 5,000 for an index, where many orders cluster.
• Old breakout levels, gaps, and the high and low of the previous day, week or year.
• Moving lines: a rising trend line or a moving average can act as dynamic support, and a falling one as resistance.

Behind every level is supply and demand. At support, buyers outnumber sellers who are still willing to sell at that price; at resistance, the reverse.

How to read it

• More touches, more weight. A level that has turned price three times matters more than one touched once, and a level visible on the weekly chart matters more than one only seen intraday.
• Breakouts. A close through resistance on clearly higher volume is the classic sign that buyers have taken control. A break on light volume deserves less trust.
• Role reversal. Once resistance is broken it often becomes support, and broken support often becomes resistance. Traders who missed the breakout buy the first pullback to the old level.
• The retest. It is common for price to return to the broken level soon after a breakout. Holding there confirms the break; falling back through it does not.
• Bull and bear traps. A move just above resistance that quickly falls back below it is a bull trap (a false breakout), and the mirror move below support is a bear trap. Traps often lead to sharp moves the other way as trapped traders exit.

Percent of Resistance

Despite its name, Percent of Resistance (PCR) is not a price level but an oscillator: it shows where the close sits within its high–low range over a set period, much like the stochastic oscillator and Williams %R. It is read the same way, with buy signals when it rises back above a low level such as 20 and sell signals when it falls back below a high level such as 80, plus divergence. Today the stochastic oscillator and Williams %R are the usual tools for this job.

Settings and common mistakes

• Treating a level as a line. Support and resistance are zones. Expect price to overshoot a little before turning, and allow for it in stops.
• Drawing too many levels. A chart covered in lines will always have one near the price. Keep the few that are clear and recent.
• Ignoring the trend. Support in a strong downtrend breaks more often than support in an uptrend.
• Stops right at the level. Many traders put stops just beyond obvious levels, which is why price often pokes through them briefly. A volatility-based buffer, such as a fraction of the Average True Range, helps.

Live chart: SPY (S&P 500 ETF), daily, with our automatic support and resistance lines, SNR(9). The chart updates every trading day.

Screen for it on MarketInOut

Our SNR indicators draw support and resistance lines automatically from recent swing highs and lows, in the same way as Williams’ fractals: snr uses highs and lows, snrc closing prices and snroc opens and closes. Only the three most recent support and three resistance levels are kept, and a level is dropped after price has closed across it more than three times. Stocks above their 200-day average that just bounced up from a support line:

exch(nyse,nasdaq) and type(stock) and price > 1 and advol(21) > 1
and price > sma(200) and snr(9) snr_bups

Stocks that just broke above a resistance line on at least one and a half times their average volume:

exch(nyse,nasdaq) and type(stock) and price > 1 and advol(21) > 1
and snr(9) snr_car and rvol(21) > 1.5

Related: Fibonacci retracements, Moving averages, Average True Range (ATR).