Page 132 - THE MARKET WHISPERER

130 PART 5 - Principles O f Technical Analysis

Support and Resistance

When technical analysts talk about support and resistance, they are usually
referring to “lines of support and resistance,” but, as is presented further
on, support and resistance can also be found at high and low points, in
moving averages, and in round numbers. Support and resistance are also
linked to another phrase: breakouts and breakdowns.
• A sharp drop in price can be a support breakdown
• A sharp rise in price can be a resistance breakout

Areas of Support and Resistance

In the early 20th century, many stock traders began to acknowledge that a
stock needs to break out from, or break down “even the smallest resistance”
in order for it to be traded. In those days, traders were not assisted by
charts or other technical tools, and only used support and resistance. They
remembered and wrote down the highs and lows, and related to them as
points of future support and resistance. Even traders on the NYSE trading
floor, who in the past had traded using hand signals, did not use any kind
of chart. Instead, they used areas of support and resistance. These traders
can hardly be suspected of unprofessionalism.

Identifying areas of support and resistance in a stock, then, is vital to
traders when analyzing the trend and determining their entry and exit
points. As already noted, professional traders are always interested in
knowing the balance of power between buyers and sellers, and these areas
indicate turning points in the balance.

SMART Who supports a dropping stock? Buyers who believe that it
MONEY will go up, and “heavy” shorters who realize profit (i.e. are
buying back their short positions) during the downtrend