What Is Resistance in Simple Terms?
A resistance level—often referred to simply as “resistance”—is a price above which a stock doesn’t tend to rise over a given period of time. In other words, it is the presumed “ceiling” price of a particular stock over a certain period. Resistance is the opposite of support. A stock’s support level is the price it tends not to drop below over a given period of time.
Stocks fluctuate in value all the time—some more so than others. The more a stock's price changes (and the greater the degree to which it changes), the more volatile it is. For any particular stock, price fluctuation can be said to occur between support and resistance levels like a ball bouncing between two invisible barriers. A stock’s support and resistance levels can change over time as its price trends higher or lower over the long term.
You can think of a stock’s resistance level as a straight line that connects two or more of its high points. If a stock is trending up in price outside of short-term fluctuations, its resistance line might be at an incline. If a stock is trading down in price outside of short-term fluctuations, its resistance line might be at a decline. If neither is the case, its support line might be near-horizontal.
Note: Some traders only use horizontal lines to represent support and resistance, while others prefer to use diagonal lines, which represent changing support and resistance prices over time. Horizontal support and resistance lines are referred to as “static,” while diagonal lines are referred to as “dynamic.”
What Timeframe Should Be Used to Draw Resistance Lines?
Two different investors might draw two different resistance lines depending on the respective time frames each wishes to examine. A longer-term investor might look at a security’s price performance over several years when drawing a resistance line so that they can identify a longer-term price ceiling near which they might wish to sell after holding for some time.
A shorter-term investor might look at the same security’s price performance over, say, three months when drawing a resistance line so they can identify a shorter-term price ceiling near which they might plan to sell after holding for a shorter time. Because these two investors have different goals, they would draw different resistance lines on different graphs.
What Is a Support Level?
Support is the opposite of resistance. If a stock’s resistance level represents its theoretical price ceiling, its support level represents its theoretical price floor. It is the price a stock is unlikely to fall below over a given period of time. Like a resistance line, a support line can be horizontal, at an incline, or at a decline depending on the direction a stock’s price is trending over the longer term.
Resistance Level Example: Boeing (NYSE: BA)
The image above features a graph of Boeing’s stock price from 06/21/21 through 12/21/21. As you can see, the stock’s price trended generally downward during this period. Dynamic resistance and support levels are illustrated with black lines. As you can see, during the period shown, Boeing’s price didn’t always rise all the way to resistance when it was going up, and it didn’t always fall all the way to support when it was in decline.
This illustrates an important point, which is that these levels are theoretical and far from absolute. There is no guarantee that a stock will decline all the way to its support level or rise all the way to its resistance level over any given period. This is why most traders who incorporate these concepts into their buying and selling decisions place sell orders a little bit below resistance and place buy orders a little bit above support—this way, these trades are more likely to execute.
What Does It Mean When a Stock “Breaks Out?”
A “breakout” occurs when a stock’s price moves above an established resistance level or below an established support level—especially after not moving outside of these levels for some time. Breakouts are typically characterized by higher-than-usual trading volume and may be triggered by the emergence of a piece of information that traders feel is relevant to a stock’s value. Interestingly, when a breakout occurs, a stock’s old support level often becomes its new resistance level (or vice versa).
How Do Investors Use Resistance and Support Levels to Make Trading Decisions?
Different investors use resistance and support levels differently when making trading decisions, and some investors—especially those who prefer fundamental analysis to technical analysis—don’t pay these theoretical price limits any mind whatsoever. That being said, any sort of investor might benefit from timing their buy and sell decisions based on a stock’s proximity to a resistance or support line.
For example, a long-term value investor who has identified a stock they believe is undervalued might look at that stock’s once-year support level and wait to buy until the stock nears that level so as to maximize their eventual gains. An investor who is bearish on a stock might wait until that stock approaches resistance before shorting it or buying a put option on it. A day trader or swing investor might draw very short-term (e.g., one week or even one day) support and resistance lines and buy and sell a stock accordingly (multiple times) as it approaches these limits.
Resistance Levels and Technical Analysis
Resistance and support levels are closely tied to technical analysis, which is the process of examining a security’s price movement and trading volume over time and using these factors to make predictions that can inform trading decisions. In other words, resistance and support levels have nothing to do with a stock’s fundamentals.
Fundamental analysis, on the other hand, involves examining company-specific metrics like cash flow and P/E ratio and company-specific qualitative factors like management skill and competitive advantage in order to determine whether a stock is undervalued or overvalued.
Resistance and support levels fall under the purview of technical analysis rather than fundamental analysis because they are based on trading prices and trading volume—not on the value, merit, sales, or prospects of a company.
Should I Wait to Sell a Stock Until It Reaches Its Resistance Level?
In a healthy market, most securities tend to go up in value over the long term. For this reason, resistance may increase, so selling when a security reaches a previous resistance level could cause an investor to miss out on additional gains.
Similarly, in a bear market, prices may trend downward in the longer term, resulting in a declining dynamic resistance line. In this case, it may be wise to sell at a price a little lower than the previous peak, as the stock may not reach that price again for some time.
Making predictions based on resistance and support is far from an exact science, so making buy and sell decisions conservatively can be a good strategy, especially for investors who are somewhat risk-averse.
Do Cryptocurrencies Like Bitcoin Have Resistance Levels?
Because cryptocurrencies like Ethereum and Bitcoin fluctuate in value and are used by many investors as trading instruments, many crypto investors do use resistance and support lines to make buying and selling decisions like they would with a stock.
