Support/Resistance
Market watchers often talk about a stock meeting support or resistance. They're referring to lines drawn on a chart -- sometimes trend lines, sometimes not -- where price has established a high or low or, in some cases, has merely spent a lot of time trading around.
Support is a line below the stock's current price that serves as a floor from which price can bounce and go higher or, at least, stop going lower. Resistance, therefore, is a level that stands in the way of a stock's continued rise. In both cases, the more times a stock's price has touched a line without going through it, the stronger the line becomes. For example, if a stock went to $70 six times without ever actually going through to, say, $70.25, then $70 would be considered strong resistance, meaning price is having a difficult time going higher.
Conversely, if price drops down to $50 several times without ever going through to $49.75, then $50 would be considered strong support, meaning that price is having a difficult time dropping below it.
The importance of support and resistance is that they are easily seen lines on a chart that can give an investor some idea of what the future may hold for the stock, and consequently, the importance of breaking through one of those levels.
One other thing to remember about support and resistance is that once price goes through them, they change. If price breaks through resistance, that resistance now becomes support. And if it drops below support, that support then becomes resistance. The chart below has an example of both lines, and at the same time a trading range, as
Microsoft(MSFT Quote - Cramer on MSFT - Stock Picks) is obviously trading between tight support and resistance before gapping down below the range on extremely heavy volume on the right hand side of the chart. That sort of break on that sort of volume is a bad sign for a stock.
Jason Meyer
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