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Support and Resistance

August 14th, 2019 by dimpledbrain

The first step to successful chart reading involves identifying (and drawing) [perfectly] horizontal lines on the chart called support or resistance.

It goes like this:

  1. Imagine a stock price dropping from a high
  2. Once it is ‘low’ enough, it starts to move sideway
  3. A stock price dropping means sellers are overwhelming buyers. There are more sellers than buyers (and hence the price drops)
  4. Once it reaches an attractive base, buyers start to emerge.
  5. At this point in time, buyers absorb any remaining units sold by sellers
  6. Hence price will stabilize as early bargain hunters absorb any remaining units
  7. Price starts to move higher after some time (due to fewer units in the market) and this will attract even more buyers
  8. This gets into a loop – stronger price attracts more buyers until it reaches the top.
  9. Return to #1 and the process repeats
  10. A breached support line will turn into a resistance line and vice versa. (if buyer emerges to buy at RM2, and forms a support line, and only later to be overwhelmed by sellers flooding the market , price will drop from this point. Subsequently, this breached RM2 line is where a lot of weak hands who had previously bought at RM2 now turned to become sellers (and hence it becomes a resistance line)
  11. This is partly psychological – weak hands who say bought at RM2 will hold on to their dear life when stock slides down to say RM1. Once it gets back to RM2, they will quickly sell the stock (risk aversion) to break even from the stock and breathe a sigh of relief.
  12. I have drawn 5 horizontal line below on a real chart below. Think of them as either support or resistance. Observe how once the support line is breached, it becomes a resistance line.

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