Support and Resistance Levels
A resistance level is just what its name implies, an area in which resistance to further advance or decline is evident. Resistance levels are generally seen when the market is in what may be termed the marking time stage between important moves. The market spends most of its time in so-called trading ranges, that is, comparatively narrow areas where is well-defined resistance at the top to further advance and equally clear support at the bottom to prevent further decline. Many short swing speculators make a practice of taking positions based on these trading ranges and will sell out or go short at the top of an established trading range, where resistance has previously been noted; they will also cover short positions and long when the market reaches the support area of the trading range. It is therefore very important to be able to recognize the characteristics of a break-out from a trading range.
A short position taken at the top of a trading range becomes a very bad position if the market develops enough strength to decisively pierce the upper resistance level and by doing so indicates that a sustained up move is getting underway. Under such conditions, it is necessary for the trader to reverse his position quickly. It can be stated that the longer period of time over which a trading area has been in effect, with its visible support and supply areas, the greater will be the move when the market finally breaks through either the top or bottom resistance level.
A resistance level is frequently a component part of many of the typical chart formations in use. A double top indicates top resistance level while a double bottom the opposite. Occasionally triple tops and triple bottoms are witnessed giving evidence of even greater well defined resistance. Over time I hope to explain many more chart patterns and open them for discussion.