What is 'Resistance (Resistance Level)'
Resistance (resistance level) is a price point on a bar chart for a security in which upward price movement is impeded by an overwhelming level of supply for the security that accumulates at a particular price level. Resistance levels are characteristically found at the upper levels of range bound markets. They may be very short lived, or may remain a resistance level over an extended period of time.
BREAKING DOWN 'Resistance (Resistance Level)'Upward price action will typically approach a resistance level, and then retrace to a lower level before retesting the resistance level again. In the case of a range bound market, price may trade down to a near term support level at the lower end of the range before attempting again to break through the resistance level. The more times that the market attempts to unsuccessfully break through the resistance level, and the greater the amount of time between attempts, the more formidable the resistance level.
Resistance and support levels are widely used by experienced traders to formulate trading strategies. For example, if a trader is long in a stock that is approaching a very strong resistance level, the trader may opt to close the position rather than take the risk of a significant decline in the position profit if the uptrend reverses.
Resistance Price Break Outs
Once the over-abundant supply that is concentrated at the resistance level is absorbed by the market, resistance is usually breached. At this point, resistance levels often turn into support areas. In a strong uptrend, investors and traders immediately react to a conclusive price resistance break out by taking long positions. This abrupt increase in demand, coupled with the precipitous decrease in supply, creates a sudden price spike referred to as the break out. Once supply and demand subsequently stabilize, the price usually retraces back to the original resistance level, where savvy traders are waiting with orders to buy, therefore creating a new support level. In most cases, price then continues on its uptrend, seeking a new resistance level.
Underlying Causes of Price Resistance
The overwhelming supply that creates a resistance level may be the result of a large institutional investor liquidating a very large position in a stock at a particular price. Until that large sell order is absorbed by the market, the price will remain at the particular level of the order, creating a resistance level. Another underlying cause of resistance levels is the use of popular technical price patterns. When enough market participants react to the sell trigger points of widely used technical price patterns, resistance levels may be created.