The concepts of support and resistance are among the most important in
technical analysis. They represent psychological barriers that can impede a
stock's move, but can also be utilized to anticipate new information. When
making a visual assessment of a stock chart, a solid understanding of
support and resistance can help investors determine entry and exit points
for profitable trading.

Simply, support is a floor price that the market for a stock has shown a
hesitation to break through in the past. The more times a stock touches
this floor price, the stronger the support is said to be. It can be defined
by a low point in trading, or by a period of price consolidation.

It is not uncommon for support prices to occur at even dollar values, as
these tend to be psychological barriers for market participants. The longer
the time period that the level of support has held up, the more important
it is. Stocks that penetrate strong levels of support often head lower.

Defining support is relatively simple. Looking at the stock chart, find
areas where the stock has trade sideways for a period or, a low point in
recent trading. If the stock has pushed the floor price on numerous
occasions, then that level of support will be strong as it holds greater
significance in the memories of investors.

>From an investor's standpoint, the level of support can serve as an exit
point from a long position, or an entry point for a short position. If a
stock penetrates a support level after a period of consolidation and
general pessimistic trading, it often heads lower. Owners of stocks that
are testing support should be wary of the downside risk that is evident,
and may want to exit the position if that support level is violated. Short
sellers should look at these situations as an opportunity to make a
successful trade on an abnormal downward move.

As a caveat, however, it should be recognized that support often serves as
a potential reversal point for negative market psychology. If a stock is
undervalued, it often bounces off of support and reverses a downtrend.
While this can happen, it is more the exception than the rule. In these
situations, be sure that the bounce actually breaks the market's pessimism
and is not just a feeble attempt to dissuade the inevitable downward trend.

Resistance is just the opposite of support. Instead of a floor price, it is
a ceiling that the market has shown an unwillingness to trade above. For a
stock to break through resistance often requires a dramatic shift in
psychology, often brought by positive new information.

To find the line of resistance, look at the stock chart and seek out high
points or trading ranges. High points provide an upper limit of value for
the stock, and trading ranges define an area where the market had a strong
consensus on the value of the company. As with support, the more often a
stock touches the line of resistance, the stronger that ceiling is. Again,
resistance often forms at even dollar values as they sit well in the minds
of investors.

Investors want to pay attention to a stock's resistance point, because a
break through that point is often followed by an uptrend. Theoretically,
resistance represents the maximum the market is willing to pay for the
company. If the market becomes willing to pay more than that price, it is
often because there are new developments that make the company worth more.
Stocks that are trading near their resistance point have the potential to
show upside volatility as the market is showing expectations for new
information.

Stocks that come through with positive new developments are able to break
through resistance and go into uptrends. Those that don't live up to the
market's optimistic expectations often bounce off the ceiling price and
remain in the trading range. Legitimate breakouts are often combined with
an abnormal trading volume at the time of the breakout.

Understanding support and resistance is essential to becoming a successful
technical investor. They act as visible thresholds indicating the state of
market psychology. Breakouts and breakdowns are strong signals for
directional moves that should not be ignored. Experience in visual
assessment of charts and their levels of support and resistance will help
determine exit and entry points for investors.