Stock prices and index levels are constantly graphed on charts to get a sense of the highs, and the lows, as well as the emerging trends to assist the investors in making future decisions. Two of these points are of great interest to investors. Informally, these can be described as the highs and the lows but, more formally, they are referred to as support and resistance. The support is the lowest point beyond which the stock prices have never fallen in a particular period of time, and is considered to be a good time to buy stocks.
Resistance, on the other hand, can be defined as the highest point when one observes a series of increases in the stock’s value. Usually various high points are taken in to create a resistance area beyond which the stock’s prices haven’t risen in a particular period of time.
Resistance in financial analyses
Many financial analysts accord great importance to the support, and resistance indicators. When a stock reaches the resistance point, it is usually taken to mean that the more likely possibility is that stock prices will likely fall in the future.
The resistance point can be considered strong or weak based on the number of times a stock has tried, and failed to cross the resistance barrier. If we graph the stock prices over a longer period of time, and observe the frequent recurrence of certain resistance levels beyond which the stock prices have consistently failed to rise; it can be considered as a strong resistance point. Conversely, if the graph is haphazard and all over the place, and there is no regular or frequent recurrence of the resistance level then it can be harder to predict the value of the stock.
Identifying the resistance level can, and regularly does, help the traders in making future financial decisions. As the stock approaches the resistance level, many investors prefer to sell the stocks at the highest possible price.
An extremely fascinating phenomenon, which also defies the common resistance logic, is the reversal. This occurs when the resistance or support levels are breached, and investors see a reversal in market trends. In many such cases, the resistance levels may even become the support.
However, resistance cannot be relied upon entirely to predict the future trends of the market and the price of the stock. Many experienced investors consider the breach of the resistance levels to be a good sign and buy the stocks sending it even higher. Correct timing is crucial when it comes to making this move.
Further Reading
- Resistance is futile: the assimilation of behavioral finance – www.sciencedirect.com [PDF]
- Corporate financing decisions when investors take the path of least resistance – www.sciencedirect.com [PDF]
- Public resistance to privatisation in water and energy – www.tandfonline.com [PDF]
- Biochemical, genetic and applied aspects of drug resistance in – www.tandfonline.com [PDF]
- The consumer resistance behavior towards innovation – www.sciencedirect.com [PDF]
- Perceptions of stress and stress interventions in finance organizations: Overcoming resistance towards counselling – www.tandfonline.com [PDF]
- The glut athione S-transferase supergene family: regulation of GST and the contribution of the lsoenzymes to cancer chemoprotection and drug resistance part I – www.tandfonline.com [PDF]
- Organisational resistance strategies to unwanted accounting and finance changes – www.emerald.com [PDF]
