Support, or a support level, refers to the price level that an asset does not fall below for a period of time. An asset’s support level is created by buyers entering the market whenever the asset dips to a lower price. In technical analysis, the simple support level can be charted by drawing a line along the lowest lows for the time period being considered. The support line can be flat or slanted up or down with the overall price trend. Other technical indicators and charting techniques can be used to identify more advanced versions of support.
What Do Support Levels Tell You?
In general finance terms, the support level is the level at which buyers tend to purchase or enter into a stock. It refers to the stock share price that a company rarely goes below. When the price of a stock falls towards its support level, the support level holds and is confirmed, or the stock continues to decline and the previously demonstrated support level must change to incorporate the new lows. Support levels in stocks can be created by limit orders or simply the market action of traders and investors.
Support and resistance levels are at the core of the technical analysis. Fundamental analysis takes a company’s performance and history into account to determine the future direction of the stock, whereas technical analysis uses patterns and trends in price. Traders use support and resistance levels to plan entry and exit points for trades. If the price action on a chart breaches the support levels, it is seen as an opportunity to buy in or take a short position, depending on what the trader sees from other indicators. If the breach occurs on an uptrend, it may even be a sign of a reversal.
The Difference Between Support Level and Resistance Level
If the support level is the price that a stock does not go below, the resistance level is the price point at which a stock has trouble growing past. Think of the support level as the floor, and the resistance level as the ceiling.
Limitations of Using Support
Support is more of a market concept than a true technical indicator. There are many popular indicators that incorporate these concepts, like price-by-volume charts and moving averages, that are more actionable than simpler visualizations. Generally, traders will want to see the support band rather than a single line connecting the lowest lows as there is always a chance support will move up and the order for a long position will go un-executed.
Those interested in learning more about support and other aspects of technical analysis may want to consider enrolling in one of the best technical analysis courses.