Support and resistance: zones where the price has already reacted

Support and resistance are among the oldest notions in technical analysis. They rest on a simple premise: a price would tend to react around levels where significant trading has already taken place. But the phrase "the price bounced off its support" gives an impression of certainty that this reading does not justify. This article explains what these notions describe, how they are spotted, how they are used as reference points and why they must be handled with nuance.

Definitions

A support is a price level or zone below which the decline has, in the past, slowed or stopped: buyers appeared at these prices.
A resistance is a price level or zone above which the rise has, in the past, slowed or stopped: sellers appeared at these prices.

The underlying idea is that these levels keep a trace: investors bought or sold there, were caught wrong-footed there, or placed orders there. Collective behaviour can remain marked there.

Zones, not lines

A support is almost never an exact price. The same level is touched at €49.80, then at €50.10, then at €49.60. It is better to speak of a zone (for example €49.50 to €50.20). Drawing a single line gives false precision. The longer the timeframe, the wider the zone in absolute terms.

How to spot them

Analysts generally use several approaches, which cross-check each other:

Previous highs and lows: the peaks and troughs where the price turned around.
Congestion zones: periods when the price stagnated in a narrow range before moving off again.
Round levels: prices such as €50 or €100, often used as psychological reference points.
Moving averages: some, such as the 200-session average, are often cited as reference points.
The number of contacts: a level where the price has reacted several times is often judged more significant than one touched once, although this point is debated (see the limits).

Role reversal

A frequently described phenomenon: when a resistance is broken, it can become a support, and vice versa. The explanation put forward is behavioural: those who had sold at that level and see the price rise above it may be tempted to buy back there if it returns, and other investors may place orders there.

This reversal is often described by analysts; it is not a rule, and it is mostly observed after the fact.

Breakout and false breakout

When the price clearly exceeds a resistance (or falls below a support), this is called a breakout. Analysts judge it more credible when:

the close is beyond the zone, and not just a wick poking past it;
the volume is above normal: see volume and confirmation;
the price holds beyond the zone for several sessions, sometimes after a return to the broken level (the "retest").

A false breakout is a crossing that does not hold: the price quickly returns into the zone. They are frequent, and they are one of the main sources of disappointment with this reading.

The limits

It is subjective. Two analysts rarely draw the same zones on the same chart.
Drawing is partly retrospective. The levels that "worked" are easily identified once the chart is formed.
The more a level is tested, the less solid it is, according to some, the more solid, according to others: there is no consensus.
News can ignore them. An earnings release or a macroeconomic event can sweep away any zone.
They describe zones of possible reaction, never certainties.

Key takeaways

A support is a zone where a decline stopped in the past, a resistance a zone where a rise stopped.
It is better to speak of zones than of lines.
A broken level can change role; a breakout is more credible with a close beyond it and volume, and false breakouts are frequent.
This reading is subjective and guarantees no reaction of the price.

Price zones combine with the reading of trends and patterns: see trends, channels and breakouts and chart patterns.

This article is for information and education only and does not constitute personalised investment advice. The examples are illustrative. Past performance is not a reliable indicator of future performance.