Not All Levels of Support or Resistance Are Created Equal! To Hold or Not to Hold? That is the Question…
Support and resistance levels are places in the market when the current trend or price move that is in play in the market will either turn or stall. Not all of these levels, however, are created equal! In reality, there are many factors that come into play when determining whether or not a particular price level will hold or fail. And if it does hold, these factors influence how long it holds for.
It is very common for most people to think of support and resistance levels in terms of absolute price levels. For example, if they are looking at $50 as a resistance levels, they mean exactly $50. On the other hand, if they are looking at moving averages as a support level, they will check to see what the exact price of the moving average is, such as $50.78.
In reality, support and resistance levels are not exact prices, but rather price zones. So, if the resistance level is $50, then it is actually the zone around that $50 level that is the resistance. The stock may hit only $49.87 or it may hit $50.25 and still hold the $50 as price resistance.
The main factor in determining exactly how much the price associated with the support or resistance level is tested by is how quickly or slowly the prices move into that zone. For example, if the zone hits very quickly on a large momentum surge, then it is more likely to push past $50 and into that $50.25 level. This is also the case if the stock is a rather volatile one with a wide price range intraday.
If the security spikes higher and does not quite hit the price resistance, such as a rally into $49.70, then it may round off into $50 with slightly higher highs and never exactly touch the $50 price resistance zone before turning over due to the slowdown in momentum into that resistance. The larger the time frame, the greater the price zone is as well. A resistance zone at $50 on a weekly time frame may have a range of $1 on each side of $50. Where traders tend to run into trouble is in thinking that because the stock has traded over $50 by more than just 10 cents that the $50 has broken, so we often hear of traders “buying the highs” or “shorting the lows” in the case of support.
While these are just a couple of the basics of support and resistance, there are many more details to keep in mind when trading based on technical analysis.
DISCLAIMER: Trading in commodities and/or securities may not be suitable for all individuals. Consult your broker or other professional to determine your suitability. The discussions provided by Toni Hansen are for educational purposes only and should not be taken as a recommendation to buy or sell the referenced security. Past performance is not indicative of future results.
