Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
then be deduced that the stock has now built a second support level at $50 (and perhaps a new stage one). What this means is that the stock would now be supported by two levels.At its first support level, it would be reluctant to drop below $50, but if it does (this condition is known as support penetration or breakdown), chances are that it will be supported by the second level at $45. And if should break down even further, it would perhaps be supported at lower levels where it had previously built support. Stocks usually have many support levels as they continue to move up in price.
Resistance Level - Resistance levels are the opposite of support levels. They are theoretical prices that a stock would have a hard time going above. Resistance prices are usually equal to or above the stock's current price, although some may argue that they could also be below the current price. Suppose our $50 stock begins to rise but every time it hits $55 it pulls back. This could indicate a resistance level at $55. It possibly means that either there are enough sellers willing to sell the stock at $55 or most buyers are not willing to pay more than $55 a share for that stock, or a combination of both. Just like support levels, resistance levels are also marked with heavy volumes. The heavier the volume, the stronger the resistance level. Now suppose the stock finally breaks through this level (known as upside breakout) and reaches $60 but then it has a hard time breaking through this price. This could mean that the stock has established a second resistance level at $60. In terms of stage analysis, resistance levels could be regarded as stage three where stocks peak and then turn around.
Recognizing support and resistance levels in a stock could help investors make trading decisions at key positions. For example, knowing that a stock has developed support at around $50, an investor may buy the stock at $50 with some assurance that it has more chance of going higher than lower. Conversely, if a stock has developed …
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