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Determining resistance points on a stock chart can help you better time your trades to maximize profits and avoid pitfalls. Resistance refers to a price level above which a stock may have difficulty rising, at least in the short run – that is, its advance is experiencing resistance and is likely to stall or reverse. Traders often use resistance as a level at which they sell stocks to take profits.
Draw a line that connects two or more recent stock price peaks, and another line that connects two or more recent price lows. The angle of the lines indicates the current trend: up or down. The lower line is called support; the upper line is called resistance. The space between the two lines is called the trading channel. Many online chart services and broker trading platforms allow you to draw lines on the charts you generate and save them for future use.
Extending the trend lines into the future, beyond the current price, will give you an idea of where a stock is likely to experience resistance. It will be obvious because you will see that the stock stalled previously each time it approached the resistance line.
Art, Not Science
A resistance point is not a specific price but rather an area, or a price range. As a stock approaches resistance, investors do not act all at once: some begin to sell earlier, trying to beat the crowd. That’s why if you determine that a stock has resistance around $39, it may actually stall around $38 if selling starts early. On the other hand, strong investor buying may carry the price above $39 before it reverses. Where or how you draw the lines on a chart can also give you slightly different resistance points. Some chartists insist on connecting absolute highs; others ignore the extreme readings and draw the lines through congestion areas where a lot of shares traded.
Types of Resistance
Resistance can be minor or major. The more times a stock has approached a specific price area before, the stronger the resistance is. A declining stock breaks down through several levels of support, which, if the stock turns back up, become new resistance levels. The more shares traded around the former support area, the stronger the new resistance is likely to be. Resistance can be short-term or long-term, depending on the chart scale you use and how far back you go to connect the extreme price points.
- Technical Analysis of Stock Trends; Robert D. Edwards, et al.