What is Resistance (Resistance Level)
Resistance, or a resistance level, is the price point at which the rise in the price of a stock or a stock index is halted by the emergence of a growing number of sellers who wish to sell the stock at that price. Resistance levels can be short lived if new information comes to light that changes the overall market’s attitude toward a stock, or they can be long lasting.
Trading With Support And Resistance
BREAKING DOWN Resistance (Resistance Level)
Resistance levels and support levels are two of the most important concepts in technical analysis of stock prices. Technical analysis is a method of analyzing stocks that assumes the vast majority of available information about a stock, bond, commodity, or currency is almost instantaneously incorporated in the price by market forces. Therefore, according to this theory, it isn’t profitable to make investment decisions based on this information. Instead technical traders try to divine how stocks will move on a short-term basis by looking at the behavior of markets in similar, past situations.
Technical traders often hope to identify both the resistance level of a stock and the support level so that they can time their buying and selling of a stock to capitalize on the price reversal that will occur after these levels have been reached.
Example of Resistance Level
Let’s say that you are studying the price history of the price of shares in the Montreal Trucking Company, with the ticker symbol MTC, and want to determine a time when it would be smartest to sell the company short. Over the past twelve months, the stock has traded between $7 and $15 per share. During the second month of the period you’re studying MTC, the stock climbs to $15, but by month 4 it has fallen to $7. By month 7, it climbs again to $15, before falling to $10 in month 9. By month 11 it climbs once again to $15 and over the next 30 days it fall to $13 before climbing again to $15.
At this point, you have clearly established a resistance level of $15. If you see no reason for the stock to breakout of the band it has been trading in over the past year, this would be a good time to sell the stock short, because the market has clearly shown that once MTC stock reaches $15, an overwhelming amount of supply comes on the market to halt its further rise. One should be careful however, as sometimes resistance levels are breached and left behind if fundamental drivers of a stock, like a booming economy or new efficiencies in a company’s business model, overwhelm technical forces.