Trenches of Bulls and Bears: Understanding Support and Resistance

Defining the Battlefield

Support: A price level where buying (demand) is strong enough to overcome selling, halting or reversing a downtrend.

Resistance: A price level where selling (supply) is strong enough to overcome buying, halting or reversing an uptrend.

Why Do They Form? The Psychology

Support and resistance stem from investor memory and regret. Suppose a stock rises from 50 to 60, then falls back to 50.

Missed out: Those who didn't buy at 50 regret it; now that it's back, they buy (creating support).

Sold too early: Those who sold at 50 want to re-enter (creating support).

Trapped: Those who bought at 60 are in pain as it drops. If it rallies back to 60, they just want to "break even," creating massive selling pressure (forming resistance).

Role Reversal Principle

A key concept: Support, once broken, becomes future resistance; Resistance, once broken, becomes future support. This explains why a pullback to a previous high is often a buying opportunity.

Estimating Strength

Three criteria determine strength: 1. Volume (more turnover equals stronger levels); 2. Price Distance (extent of the loss); 3. Time (recent levels are more significant).