Support and resistance are undoubtedly two of the most discussed concepts in technical analysis. It is not uncommon to see certain price levels prevent traders from pushing a stock higher. These levels are known as resistance and they tend to act as a ceiling until the stock is able to move above it.
In general, when a stock is able to break above an established level of resistance, this is often followed by a rise in price because it suggests that the downward forces have weakened and that bullish traders are willing to take control of the direction. A common method for identifying levels of resistance comes from drawing a trendline that connects a series of highs. In a trending market, these resistance levels can be identified by a trendline that is drawn at the most recent high. A trendline that is drawn at the nearby swing high is used to bring a trader's attention to a price level has prevented a move higher in the past. A price move above a swing high is a bullish signal and often triggers a surge in buying pressure. Let's take a look at a few companies that have recently been able to break above influential levels of resistance.
Franklin Resources Inc. (NYSE:BEN) - Taking a look at the daily chart of BEN, you'll notice that the $105.50 level (shown by the horizontal trendline) has prevented the price from heading higher since the start of the year. The influential level of resistance has caused the price to trend sideways for most of 2008, but the recent close above this level suggests that the story is changing. The break above the trendline combined with the bullish price action that has dominated over the past couple of trading days suggests that the short-term direction could remain upward. Many traders will likely watch for the price to test the next level of resistance, which is near $116.
AES Corp. (NYSE:AES) - AES is another company that has recently been able to break above its nearby swing high. As you can see from the chart below, the $20 mark acted as a short-term level of resistance, but today's close above suggests that the price may be getting ready to make a move higher. Short-term traders will likely watch for the stock to make a move toward the next level of resistance, which is currently near $21 (dotted line). Longer-term bulls will probably watch for a move toward the December highs, which are represented by the top line on the chart.
ArvinMeritor Inc (NYSE:ARM) - Bullish traders have been trying to send the price of ARM beyond an influential level of short-term resistance. As you can see from the chart below, the $17 mark has prevented the bulls from sending the price higher in the past and now many are curious to see if this will happen again. This stock will likely remain on the radar of many short-term traders because a close above the nearby trendline could trigger the start of another wave upward.