ASX Charting Course
Chapter 4
Support and Resistance
There are price levels that market traders appear to recognise as floors or ceilings to price action. The floor is commonly known as support and the ceiling as resistance. Support is always below the current price and resistance above.
Support is created as a result of the market making a low and resistance as a result of price making a high. The more times the market tests these levels and holds, the better the support or resistance is said to be.
Support develops as the result of price testing a price level and failing to break lower. In fact if price repeatedly rallies off a particular level, even if it’s only twice, we can view this as confirmation of the support level. The more often it rallies from a level the better the support.
Resistance is like a price cap, a price that the market just can’t seem to get above. It’s a barrier to higher prices, a level where sellers outnumber the buyers.
Fig 5a
Construction
Using a hi, lo, close bar chart, basic support is found by locating chart lows and drawing a horizontal line across to the current date. The more points picked up along this line the better the support. A more refined support line can sometimes be drawn a little higher, disregarding some outliers, if it picks up more points. After all the reason we’re looking for support is for the ideal opportunity to buy the market and minimise the risk.
Resistance, on the other hand is located at price peaks, highs. They could be major tops or just minor aberrations and the strength of the resistance will be reflected not only the location, but also the frequency with which the market has tested the level.
Craig MacLean is a Futures Adviser Licensed under the Australian Securities Commission, Corporations Law. The writer accepts no responsibility for any losses incurred from any action or inaction derived from the advice in this report.