Support and resistance

The market has a memory. Not in a magical sense but a very down-to-earth one: people who bought shares expensively and have been waiting for months for price to come back so they can exit without a loss are concrete sell orders waiting at a concrete level. Those who missed the rally and promised themselves they would buy on the next pullback are buy orders waiting lower down. Support and resistance are simply a map of the places where such orders pile up.

What you will learn

• what support and resistance are and why it pays to think of them as zones,
• which levels matter and which are just lines drawn out of boredom,
• what happens when a level is broken and why support can turn into resistance.

A zone, not a line

Support is a level where demand was once strong enough to stop a decline. Resistance is a level where supply stopped a rise. In practice it is rarely a single price, because market participants do not make decisions to the cent. It is better to think of a zone a few percent wide: the more volatile the instrument, the wider the zone.

A simple technique helps. Instead of drawing a thin line, draw a rectangle covering both the wicks and the bodies of the candles that stopped price earlier. If the next attempt touches the zone rather than the exact line, you have no reason to conclude that the level "did not work".

Which levels matter

On any chart you can find dozens of places where price once turned. Only some of them matter. The levels that work best meet several conditions at once:

• price bounced off them several times: at least twice, ideally three times,
• their tests came with clearly higher volume, meaning many participants had something to say here,
• they are clearly visible on a higher timeframe (weekly), not only on an hourly chart,
• they are round numbers or old highs and lows that the whole market is looking at.

The more of these features, the greater the chance the level matters. One bounce out of two on a 15-minute chart is not yet support.

When a level breaks: switching roles

The most interesting property of these levels: once broken, they switch roles. A resistance that has been clearly exceeded often becomes support, because those who sold here earlier with relief now buy, and those who missed the breakout wait for a pullback. The other way round, a broken support becomes resistance, because those who bought there and ended up under water wait for a chance to leave without a loss.

A breakout is more credible when price closes the session (or the week) outside the zone, rather than just piercing it with a wick. It also helps when it comes with elevated volume. A wick poking beyond the level, after which price returns to the zone, is not a breakout but a test that failed.

Chart example: the S&P 500 index, weekly chart

On the weekly chart of the S&P 500 index one very important level stands out. The record from early 2022, around 4,800 points, was the market's reference point for two years: as long as the index stayed below it, every commentator talked about "making up the losses". Moving above that level in January 2024 turned it from a ceiling into the point from which the market began building further records.

Open that chart and mark a zone around the old high. Check two things: how price behaved near the zone before the break, and whether after the break it came back to test the zone from above. The exercise shows the switch of roles nicely and also teaches patience: sometimes the market comes back for a test right away, sometimes never.

How it fails

• Too many lines. If your chart looks like a lined notebook page, you have no levels, only decoration. Keep five or six of the most important ones.
• Drawing after the fact. In hindsight you can always draw a level that "worked perfectly". The real test is marking it before price tests it.
• False breakouts. The market likes to show a breakout, collect stop orders and return. A close outside the zone and volume reduce this risk but do not eliminate it.
• Levels age. An old high from ten years ago matters less than one from last year, because the market participants have changed.

Check yourself

1. How does support differ from resistance?
2. Why is it better to think of levels as zones rather than lines?
3. Name three features that increase the importance of a level.
4. What usually happens to resistance after it is clearly broken?
5. How do you tell a breakout from a failed test?

Next lesson

Lesson 3. Candlesticks: anatomy and reading: you already know where the market is heading and where its important levels are. Time to learn the alphabet the market uses to write its stories. A single candle can tell you who won the session and whether the victory was sincere. I will show you how to read one in a few seconds.

Educational material, not investment advice.