Technical Analysis 101: The Importance of Support and Resistance

The idea that drawing lines on a chart can make you money has been a matter of contention for years. But the fact remains that technical analysis works… and works well.

And the key to its effectiveness lies entirely in its popularity among large audiences, and its gauge of overall momentum, fear and greed.

Let me ask you this.

If everyone continues to sell at a specific price on a chart over and over again, wouldn’t you question it and perhaps use it to your advantage?

Those wanting to make a great deal of money would.

Some of the most reliable indicators of potential selling and buying pressure can be uncovered with the understanding of support and resistance, or a price floor or ceiling.

When prices are falling to the floor, support represents the moment when buying begins to overwhelm selling and prices begin to bounce back.  Conversely, when prices move to the ceiling, resistance is the point where selling begins to overwhelm buying and price increases begin to reverse.

You can identify support and resistance by studying charts.

Look for a series of low points when a stock continues to fall to a certain level, but then doesn’t fall any more. Typically, this is support.  And when you find a stock that rises to a certain high, but rises no more, you have found resistance points.

Look at this chart of Glu Mobile (GLUU) for example.

In October 2018, we can see double bottom support. Investors piled in twice just above $5.50 a share, creating double bottom support.

Between November and December 2018, we can clearly see double-top resistance.  In fact, the stock is beginning to fail again at this resistance point – a clear indication that it’s time to take some gains off the table for a potential pullback.

Again, while drawing lines on a chart may not seem worthwhile, it is if you want to spot great entry and exit points in your favorite stocks, indexes and ETFs.