The support line is the level where there is a tendency for prices to rise, because there are more buyers than sellers, or demand is greater than supply. While the resistance line is the level where there is a tendency for prices to fall, because there are more sellers than buyers, or supply is greater than demand.

At one time, the buying power could be greater than the sell power which had previously pushed the price down in a bearish trend. On the other hand, there are times when the sell power manages to outperform the buy power that previously dominated. If that happens, a point called a price reversal will appear. This is what is then referred to as the point of support and resistance in the trading world. No doubt, understanding support and resistance is a basic knowledge that novice traders must know, before they learn more about technical analysis. Why do support and resistance points form? What is the trigger? The answer is because of the profit-taking actions carried out by traders.

The support and resistance lines are certainly not "magic lines" that can cause prices to move up or down but are the reflection of the psychology of market participants themselves. Market participants are divided into three categories, namely: people who buy, people who sell and people who do nothing.

When the price of a stock corrects or falls to a certain level and then reverses up from that level, people who had bought will feel happy and at the same time regret "why didn't you buy more before". People who have not had time to buy are also full of regret because they "didn't have time" to buy before. While the people who sell also have that feeling. They feel they have made a "mistake"—because the price of their shares, which had already been sold earlier, is now rising steadily. They are people who fall into the category of greed (greed).

There is another group that is now in a "wrong direction" or is experiencing losses. These are the people who short sell. The higher the share price, the greater the loss will be. They are overcome by fear and are now waiting for an opportunity to buy-to-cover* on their short-sell. These people really hope that the price will immediately fall back to that level or their breakeven point so they can get a return on their investment.

Picture by Karolina Grabowska from Pexels

Although the people mentioned above have taken different actions, but it leads them to take the same action in the future, namely all of them take a stand ready to buy! If the market gives a “second chance”. The same thing applies to the resistance line, where at that time the bulls were filled with fear and the bears were filled with greed, all ready to sell at the next opportunity!

It is the feelings of market participants who are filled with fear and greed that always encourage every buying and selling action in the market, forming and executing. The higher the volatility of a market, the higher the level of fear and greed that covers it. 

The stronger the feeling, the stronger the support or resistance level that will be formed. If the price movement then reverses to the previous level, the buy or sell impulse will cause the price to bounce back.

The more transactions or volumes that occur on the support and resistance lines, the higher the commitment of market participants, the stronger the chart will be. In addition, the frequency with which the stock price “plays” at support and resistance also determines its strength. 

The more often “touched”, means the level is getting tested or getting stronger. In addition, the time factor also plays a role. For example, five-month support or resistance is said to be stronger than five-day support or resistance.

This is an illustration of how the impact of human psychology in shaping Supply and Demand which then affects stock prices. Technicalists study a chart to read what is really happening in the market, compare it to the past and identify patterns that are often repeated as a result of the reactions of market participants.

Support and resistance are formed due to past memories and current feelings.

SUPPORT AND RESISTANCE LINE BREAKOUT

If a support line is successfully penetrated by price movements, then the line will turn into a resistance line. The stronger the previous support, the stronger the resistance will be.

Conversely, if a resistance line is successfully penetrated by price movements, then the line will turn into a support line. The stronger the previous resistance, it will become an equally strong support.

Question: When can a support or resistance line be declared to have been broken (valid break)?

The same principles apply as trendlines. A line of support or resistance is said to have been broken if the ‘closing price’ is outside the line. The support is declared a valid break if the closing price is below the line, on the contrary the resistance line is declared a valid break if the closing price is above the line.

PULLBACK

When the price re-tests a support or resistance level that has been passed, it is called a pullback. As seen in the picture below (A), the pullback that occurred succeeded in testing the support level and continuing its uptrend. In picture (B) the pullback has successfully tested the resistance level and continued its downtrend pattern. This Pullback area is a test of how strong the trend will be or just a false break.