What are Support & Resistance Levels?
Levels of support & resistance are the backbones of technical analysis. Technical analysts use support and resistance levels to identify price points on a chart where there is a potential pause or reversal of a prevailing trend.
Support occurs where a downtrend is expected to pause due to a lack of demand. Support zones are also synonymous with zones of accumulation.
Resistance occurs where an uptrend is expected to pause temporarily, due to a lack of selling. Resistance zones are also synonymous with zones of distribution.
Example of Support & Resistance
Looking at the weekly time frame of ALGO (Algorand) we can see some pretty evident support & resistance levels. Two levels of support along 0.14 & 0.26, as well as a resistance turned support at 0.5070. The levels of resistance pictured are placed at 0.62 & 0.81.
How to Identify Levels of Support & Resistance
Levels of Support & Resistance, although are complete opposites, are identified basically the same.
A Support Level is drawn out usually from the start of an uptrend or swing low of the downtrend.
Support is a price level where a downtrend can be expected to pause due to a lack of demand or buying. As the price drops, demand for the shares increases, forming the support line.
A Resistance Level is drawn out usually from the top of the downtrend or swing high of the uptrend.
Resistance is a price level where an uptrend can be expected to pause due to a lack of selling. As the price of the asset drops, demand for the shares increases, forming the resistance line.
Once a zone of support & resistance has been identified properly, those price levels can act as entry & exit targets or pivot points. From the touch of either one of these levels it bounces in between the two, often compared to pong, where the ball is getting bounced between two lines.