Support And Resistance Line

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21 Aug, 2024

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The support and resistance (S&R) lines are the trend lines representing the low and the high possible price points on a chart. The primary purpose of these lines is to provide traders and analysts with potential entry and exit points for trades.

The support level shows the lowest price points where the supply is higher than demand, thus, attracting more buyers than sellers. In contrast, a resistance line connects the peak price points where the demand exceeds the supply, attracting more sellers than buyers. Thus, the S&R levels serve as the barriers beyond which the price cannot fall or rise.

What Is A Support And Resistance Line?

The support and resistance lines depict the target price levels of an asset on the chart, i.e., the lowest and the highest price levels where the maximum buying or selling may occur.
The area between the S&R lines is the range of price movement of an asset in the market-determined through the moving average method or trend lines. It is also called the support and resistance area.
S&R levels facilitate the analysts to anticipate future trends and price reversals, and breakouts.
The S&R levels are considered as an asset's expected price barriers.

Support And Resistance Line Explained

The support and resistance (S&R) line is a widely used technical analysis tool in the stock market. The S&R lines determine an asset's high and low prices on a price chart for the selected time frame. Furthermore, It is used for plotting the support and resistance area, which is the portion lying between these lines. Therefore, investors and analysts use S&R to identify future trend reversals and breakouts, set stop losses, and adjust to changing trends.

Thus, the rule for support and resistance lines says that when the asset price drops below a support level, it becomes the resistance line. Similarly, when the asset price increases beyond the resistance level, it becomes the new support line.

Moreover, support and resistance lines can be applied to stocks by:

Identifying the support level
Recognizing resistance levels
Confirmation and breakouts
Volume and price action

In short, at the support level, the buyers raise the demand by being attracted to the downtrend. On the other hand, while at the resistance level, the buyers resist investing in the security due to the uptrend, thus decreasing stock demand. However, the support and resistance lines are mere indicators of the possible price reversals for the predictive study. Hence, the support and resistance line indicators can help traders identify the potential levels. Therefore, the actual results may deviate from the estimated figures.

Moreover, the accuracy depends on the analytical skills of the users and the selection of an appropriate time frame. Furthermore, the trading view offers additional features and indicators that complement the analysis, such as volume, moving average, and oscillation. Hence, trading View support and resistance lines represent key price levels on a stock chart.

How To Draw?

The S&R lines are often drawn as horizontal lines, representing specific price levels rather than sloping trends. Therefore, the basic steps for drawing the support and resistance lines are as follows:

Step 1: Determine a suitable time frame

The first step is to decide the period of price movement of the asset for which the analysis will be performed. A short period for analysis is usually between 3-6 months, while a long period pertains from 12 to 18 months. However, the time frame selection is totally up to the technical analyst and the purpose of the study.

Step 2: Prepare a chart

The next step is to load a price chart for the relevant time frame decided in the previous step. Then, the analyst can use various websites like www.investing.com or www.tradingview.com to generate the price chart of the assets.

Step 3: Spot the low and high price points

Then, the analyst should mark all the low and high price points on the price chart. It is advisable to highlight all the low issues with one color and all the high points with another color to make a visible difference between them.

Step 4: Connect the points

The final step is to draw a line by connecting the high price points, the resistance line. Also, join the low price points to acquire the support line. Remember, don't run behind perfection. Instead, consider the swing highs and lows and the key levels which are repetitively touched to ensure a more realistic outcome.

Examples

Let us understand the concept better with the help of an example.

Example #1

Let's consider a stock with the following price data:

Swing High: $75
Swing Low: $60

Based on this data, we can draw the following support and resistance lines:

Support Line: We draw a support line connecting the swing low at $60. This line represents a possible support level where buying pressure has historically been strong enough to halt or reverse a downtrend.
Resistance Line: We draw a resistance line at the swing high of $75. This line represents a potential resistance level where selling pressure has historically been strong enough to halt or reverse an uptrend.

Therefore, in this example, the stock price approaches the support line around $60 and bounces off it, indicating a potential buying opportunity. The price then moves higher and reaches the resistance line at $75 but fails to break through, suggesting a possible selling opportunity or a point to reconsider long positions.

Example #2

Another example is Levi Strauss & Co. (LEVI). Here, we will analyze the one-year price chart of the stock:

Again, in the above chart, the red lines signify resistance, and the blue ones resemble support. The current resistance level is 19.36, beyond which the price starts falling; the current support level is $15.47, beyond which the price rises.

One can look at various such charts on the online platform, TradingView to understand the concept of support and resistance levels better.

Chart

A sample S&R line chart is shown below:

A price chart is the key element of the support and resistance technical analysis. It helps to locate, mark and draw a line across the price highs and lows. A support and resistance line chart visually represents an asset's estimated high and low price points during a given period.

In the above chart, the upper slanted line denotes the resistance line, while the horizontal straight line below represents the support line. When the price is near the resistance, it stops rising and dips. On the other hand, when the price nears the support line, it stops falling and bounces back.

Note that if the price increases above the resistance line, that line becomes the support. Also, if the price drops below the support line, that particular line will become the resistance line. In contrast, if the price moves above or below the resistance or support levels, it is an indication that there is a shift in the market supply and demand.

Frequently Asked Questions (FAQs)

1. How do support and resistance line work?

As the supply overpowers the demand, the price starts falling (downtrend) until it reaches the lowest price point, the support level, where the market gets concentrated.
However, when the demand surpasses the supply, the price keeps rising (uptrend) to a certain level where supply gets concentrated. In both these scenarios, the price reversals can be observed at the support and resistance levels.

2. What happens when support and resistance lines cross?

As the support line intersects the resistance line, the trend breaks into a new direction, forming confluence areas on the asset's price chart. Thus, it facilitates the prediction of such breakouts or diversions from the prevailing trend. At this point, the price can go beyond the support or resistance levels.

3. Do support and resistance lines always hold?

While support and resistance lines can be reliable indicators, they could be more foolproof. The price may occasionally break through these levels due to factors such as strong market trends, news events, or shifts in supply and demand dynamics. Therefore, traders should use support and resistance lines with other technical analysis tools and market conditions for more accurate predictions.